Person late sixties with State, DB and SIPP pensions. Total unearned income circa £55,000 and no earned income.
They pay in the usual £2,880 to a HL SIPP for someone with no earned income.
Worked Example of this person who is a 40% tax payer. Assume no charges as all done in cash and not invested.
Pension Contribution £2,880
HL claim 20% relief £ 720
Total after Tax Relief added £3,600
Tax Free taken £ 900
Taxable income £2,700
Tax at 40% -£1,080
Tax relief from Tax Return £ 720
Total Income £3,240
Less Original Contribution £2,880
Advantage £ 360
If the persons unearned income was say £45,000 and no earned income, the advantage they would receive under the same contributions would be £180.
Have I got a number wrong here?
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Higher Rate Pension Tax Relief worked example
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Re: Higher Rate Pension Tax Relief worked example
The shuffling of the tax relief just achieves the effect of taking the contribution from pre-tax income - as it's already been taxed, the relief un-taxes it. So the effective result it to pay in £3600 untaxed, and take out £2700 taxed and £900 untaxed. The saving is the tax on £900. So if you're a 40% taxpayer you save £360 (40% of £900), if you're a 20% taxpayer you save £180 (20% of £900), and if you're under the personal allowance you save £0 (0% of £900).
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Re: Higher Rate Pension Tax Relief worked example
SteelCamel wrote:The shuffling of the tax relief just achieves the effect of taking the contribution from pre-tax income - as it's already been taxed, the relief un-taxes it. So the effective result it to pay in £3600 untaxed, and take out £2700 taxed and £900 untaxed. The saving is the tax on £900. So if you're a 40% taxpayer you save £360 (40% of £900), if you're a 20% taxpayer you save £180 (20% of £900), and if you're under the personal allowance you save £0 (0% of £900).
No, if you are under the personal allowance limit then your contribution will come from untaxed money but you then still get tax relief when you contribute that to a pension and hence end up £900 better off as none of what you then take out is taxed.
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Re: Higher Rate Pension Tax Relief worked example
ursaminortaur wrote:SteelCamel wrote:The shuffling of the tax relief just achieves the effect of taking the contribution from pre-tax income - as it's already been taxed, the relief un-taxes it. So the effective result it to pay in £3600 untaxed, and take out £2700 taxed and £900 untaxed. The saving is the tax on £900. So if you're a 40% taxpayer you save £360 (40% of £900), if you're a 20% taxpayer you save £180 (20% of £900), and if you're under the personal allowance you save £0 (0% of £900).
No, if you are under the personal allowance limit then your contribution will come from untaxed money but you then still get tax relief when you contribute that to a pension and hence end up £900 better off as none of what you then take out is taxed.
Sorry, yes, you're correct. In that case you'll get the tax relief as if you're a 20% taxpayer, so gaining £180 on the £900, but you'll also get £720 on the other 2700 as this will be de-taxed at 20% and then re-taxed at 0%. As you say, you gain £900 in tax relief - even though you didn't pay any tax to get relief from, which is unusually generous for HMRC.
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