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Where Taxpayers and Advisers Meet

Help with tax calculation please

LWBLA
Posts:11
Joined:Sat Jun 16, 2012 11:17 am
Help with tax calculation please

Postby LWBLA » Sat Jan 18, 2020 1:08 pm

Hello,

I am trying to ascertain how much GROSS personal pension I require in order to break even with my expected expenditure. I have 2 forms of income - the State Pension and a personal pension. I understand that my personal pension is split with 75% of it being taxed and 25% being tax free. I also understand that the State Pension has no tax free element to it. I’m likely to pay income tax at the basic rate of 20%.

What I’m trying to establish is what the gross pension needs to be in each tax year in order that I break even at the end of the tax year.

E.g. If z equals my known expenditure (say £30K) and y is my known State Pension (say £8K) and x is my gross personal pension, how do I establish what x has to be in order that x plus y = z (given that part of the gross personal pension is tax free, and there is a personal allowance of £12.5K to be factored in)?

This could be completely wrong but I have tried to write an equation to show this, as follows:

z = (((x X 0.75) + y)) - 12500) X 0.2 + (x X 0.25)

Would anybody be able to let me know if this equation is correct and also is anyone able to simplify the equation with x being the subject of the equation?

Thank you!

D&C
Posts:154
Joined:Mon Nov 25, 2019 11:35 pm

Re: Help with tax calculation please

Postby D&C » Sat Jan 18, 2020 1:30 pm

Your personal pension is only split 25/75 if you yourself have specifically opted for that choice.

A lot of people take a tax free lump sum up front and then 100% of all subsequent pension payments are taxable. So you might want to double check that.

Turning to your original question, you have overlooked one very significant point.

You don't have any income which counts as earnings for pension contribution purposes. In which case you cannot pay more than £3,600 gross into s personal pension.

You hand over £2,800 and the pension company, courtesy of HMRC, add the 25% uplift.

D&C
Posts:154
Joined:Mon Nov 25, 2019 11:35 pm

Re: Help with tax calculation please

Postby D&C » Sat Jan 18, 2020 1:32 pm

You hand over £2,800 and the pension company, courtesy of HMRC, add the 25% uplift.
That should have been hand over £2,880 ;)

LWBLA
Posts:11
Joined:Sat Jun 16, 2012 11:17 am

Re: Help with tax calculation please

Postby LWBLA » Sat Jan 18, 2020 1:35 pm

I don't intend to take any tax free lump sum. The situation I am asking about is for retirement so I won't be paying anything into my personal pension.

D&C
Posts:154
Joined:Mon Nov 25, 2019 11:35 pm

Re: Help with tax calculation please

Postby D&C » Sat Jan 18, 2020 2:01 pm

Misunderstood sorry, mistakenly thought you were referring to contributions not income!

But won't you need a brand new formula every single tax year as the Personal Allowance and tax rates are not constant.

For example if you are Scottish resident and want £30k net then you are going to be paying some tax at 19%, some at 20% and some at 21%.

LWBLA
Posts:11
Joined:Sat Jun 16, 2012 11:17 am

Re: Help with tax calculation please

Postby LWBLA » Sat Jan 18, 2020 2:06 pm

Thanks for your reply and sorry for not being clear about referring to being retired! Yes, elements of the formula will change according to the tax free amount and tax rates. To be honest, that's the bit I understand - it's the gross personal pension part of the calculation that has defeated me.

D&C
Posts:154
Joined:Mon Nov 25, 2019 11:35 pm

Re: Help with tax calculation please

Postby D&C » Sat Jan 18, 2020 2:15 pm

Sure it's doable but past my formula knowledge.

Don't forget that the tax deducted from the personal pension will be based on the tax code and this takes into account the State Pension (which as you rightly say is paid in full with no tax deducted at source).

So a crucial element will be the tax code and tax tables the pension payer uses.

So for example based on your example the tax code is likely to be 450L (Personal Allowance £12,500 less State Pension £8,000 = £4,500 tax code allowances).

So a pension of £27,000 will give you take home income of £22,501.80. Plus £8,000 State Pension = £30,501.80

LWBLA
Posts:11
Joined:Sat Jun 16, 2012 11:17 am

Re: Help with tax calculation please

Postby LWBLA » Sat Jan 18, 2020 2:20 pm

OK, thank you for your thoughts. I'll wait to see if there are any maths wizards on hand regarding the equation.

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

Re: Help with tax calculation please

Postby robbob » Sat Jan 18, 2020 2:49 pm

Sure it's doable but past my formula knowledge.
That sounds like a challenge - duly accepted.

ok lets try this

z = x + y - (x * 0.15) + ((12,500-y) * .2)

LWBLA
Posts:11
Joined:Sat Jun 16, 2012 11:17 am

Re: Help with tax calculation please

Postby LWBLA » Sat Jan 18, 2020 5:14 pm

Thank you! I will give that a go.


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