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Calculating Personal Pension Relief

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Joined: Tue Mar 02, 2010 10:03 am

Calculating Personal Pension Relief

Postby twricharde » Tue Mar 02, 2010 10:05 am


I've recently received my PAYE Coding notice and I'm trying to establish whether the Personal Pension Relief is correct (and how indeed it is calculated!).

Can anyone confirm or correct my understanding of how this works?

Let's say I earn £48,000 p.a. (salaried so considered a 40% tax payer).

If I contributed 5% of my salary to my personal pension and my employer also contributed 5%, then my pay slips would look something like this...

Employees Cont £160 (5% of £4000 monthly gross salary - 20% tax taken at source and reclaimed by the pension provider to make the contribution back up to £200)

Employers Cont £200 (5% of £4000 monthly gross salary)

Now, on the PAYE Coding notice it states that as it expects me to pay 40% tax this tax year I'm entitled to further relief.

The question is, how is this figure then calculated????

Is it the £160 I pay monthly x 12 and the additional 20% tax readded?
i.e. (£160 x 12) x 1.25 = £2400 (The same as my employers gross contribution?)

Is it just the difference between the Gross contributions and the Net contributions for the year?
i.e. £2400 - £1920 = £480

Or have I missed the whole point :?

Sorry if this seems a simple/stupid question.

Thanks in advance

Ian Wright
Posts: 288
Joined: Wed Aug 06, 2008 3:23 pm

Re: Calculating Personal Pension Relief

Postby Ian Wright » Tue Mar 02, 2010 8:06 pm

Your basic rate band should be increased by the gross equivalent of your pension payment so that you get the additional 20% tax relief on your pension payment. This should come by an adjustment to your coding at your marginal 40% rate so..........

£200 x 12 = £2,400 x 20% = £480 (this is your relief at higher rates). To get £480 relief whilst earning at 40% in your coding we divide it by 40% giving you an allowance of £1,200 (£480/40%). So your coding would have to show and extra allowance of £1200 to take into account your pension payment higher rate relief.

If your earnings cross both band then the calculation is somewhat more complicated.

Without knowing what your coding notice says it is hard to know whether it is right or wrong.


Ian Wright
Tax Consultant
Wright Tax Consultancy Ltd

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