Tax relief (greater than tax paid) on pension contributions?

I know the received wisdom is that ISAs are a better bet than pension contributions for basic rate taxpayers. However, what if the taxpayer's liability in a given year is less than 3,600? In the year just ending, my wife's income will be just over 8,000. The personal allowance is just over

6,000 so her tax liability will be about 400. She does not have relevant earnings, so her pension contributions limit is 3,600 - on which she would get tax relief of 720 (by paying 2,880 as I understand it).

So... the questions:

  1. Am I right in thinking that she can pay up to 3,600 in pension contributions even though her total taxable income is less than 3,600?

  1. Does this in fact result in tax relief of less than the actual tax paid on her income? It seems to me that in my example if she gets relief of 720 but only pays tax of 400 then the government is genuinely chipping in

320 - which is an immediate return of 11%. Is there a flaw in this reasoning?

Regards

Jonathan

Reply to
Jonathan Morton
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"Jonathan Morton" wrote in message news:IoOdnV4xiZTRaS snipped-for-privacy@bt.com...

You are right on both counts. You don't need to have any earnings at all to be allowed to pay 2,880 net into a personal pension and have it grossed up to 3,600 by the Revenue.

Rob Graham

Reply to
robgraham

"Jonathan Morton" wrote in message news:IoOdnV4xiZTRaS snipped-for-privacy@bt.com...

They aren't necessarily.

Yes.

More you meant.

No.

This shouldn't affect your decision as to whether you invest in a pension or ISA though - the important issue is the tax rate she'll be charged when she draws the pension. If it's likely to be zero then the government really are giving an "immediate return of 11%", otherwise if it's going to be 20% they'll have what they gave back off her (well apart from the 25% that you can take tax free).

Reply to
Andy Pandy

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