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Where Taxpayers and Advisers Meet

Why don't pension contributions reduce my income?

johnwilliams79
Posts:4
Joined:Tue Oct 24, 2017 10:13 pm
Why don't pension contributions reduce my income?

Postby johnwilliams79 » Fri Nov 24, 2017 7:18 pm

Hi,
Looking for some help.

I earn over 100k and am planning to make a contribution into my workplace pension to minimise tax.
When i put some test numbers into the self assessment site I can see that it has a great benefit to the tax and it all makes sense in my head
my workplace pension is Relief At Source I think - the deduction is on the right hand side of my payslip and when i look on the pension providers website i see the 20% added to my contribution.

So i am totally happy with the tax element.

my question is about free 30 days childcare hours for my little one. You only get this if you earn less than 100k.

When I pay more into my pension, all it does is alter the allowances, it doesnt actually lower my income. Is this right?

If this is the case, then i think i'd be better off if my employer had a different way of collecting contributions, i.e before tax via salary sacrifice.

Assuming my employer wont change the scheme then can i pay into a pension by writing a cheque and use a different part of the self assessment form to lower my actual income? like a workplace expense would do.

all help much appreciated.

Thanks

AdamS93
Posts:268
Joined:Tue Sep 26, 2017 6:28 pm

Re: Why don't pension contributions reduce my income?

Postby AdamS93 » Sat Nov 25, 2017 8:56 am

Firstly, if I were you, I would pay for a meeting with a tax adviser, as an employee shouldn't cost an arm and a leg.

Unfortunately, if you have received a 20% tax credit on your pension contributions, these are included in your taxable income for the purposes of the free childcare.

Where you receive 'relief at source' as you say, there is no 20% tax added to your contributions, the relief comes from the contributions not being included in your taxable income therefore no tax credit to be added back as there was never any tax deducted.

Personal pension contributions and most employee contributions are included in your taxable income, tax relief is obtained by and increase in your tax bands.

There are things you can do to reduce your taxable income but most of them will require cooperation from your employer.

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Why don't pension contributions reduce my income?

Postby robbob » Sat Nov 25, 2017 10:55 am

When I pay more into my pension, all it does is alter the allowances, it doesnt actually lower my income. Is this right?
It depends about the context you are asking the question about- normally your allowance are altered but not in the specific context you are asking about (strange but true)
my question is about free 30 days childcare hours for my little one. You only get this if you earn less than 100k.
specifically here we are talking about "adjusted net income"
(5) The third condition is that the parent does not expect their adjusted net income to exceed £100,000 in the relevant tax year.
http://www.legislation.gov.uk/uksi/2016 ... ion/4/made

Thankfully to calculate adjusted net income you deduct your Grossed up pension payments to arrive at the relevant income figure - so you can deduct the gross up pension payments made when calculating your adjusted income.
Step 3 - take off pension contributions
If you made a contribution to a pension scheme where your pension provider has already given you tax relief at basic rate, take off the ‘grossed-up’ amount - what you paid plus the basic rate of tax.

So, for every £1 of pension contribution you made, take £1.25 from your ‘net income’.
https://www.gov.uk/guidance/adjusted-net-income


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