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Higher Rate Pension Tax Relief worked example

mearnsfool
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Higher Rate Pension Tax Relief worked example

#503251

Postby mearnsfool » May 27th, 2022, 9:16 pm

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?

SteelCamel
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Re: Higher Rate Pension Tax Relief worked example

#503260

Postby SteelCamel » May 27th, 2022, 11:12 pm

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).

ursaminortaur
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Re: Higher Rate Pension Tax Relief worked example

#503346

Postby ursaminortaur » May 28th, 2022, 11:39 am

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.

SteelCamel
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Re: Higher Rate Pension Tax Relief worked example

#503412

Postby SteelCamel » May 28th, 2022, 2:33 pm

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.

mearnsfool
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Re: Higher Rate Pension Tax Relief worked example

#503432

Postby mearnsfool » May 28th, 2022, 3:54 pm

Thanks for the confirmation!


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