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Where Taxpayers and Advisers Meet

Higher rate tax payer pension relief

hackneyblueboy
Posts:2
Joined:Sun Jun 20, 2021 9:54 am
Higher rate tax payer pension relief

Postby hackneyblueboy » Sun Jun 20, 2021 10:02 am

Hi Guys

I've recently moved onto a salary in excess of £100k and with bonus can exceed £125k.

I've read about utilising my pension to reduce my tax liability but had a few questions.

1. My understanding is that my taxable income is based on pay before any pension contributions. If so is the benefit to me the relief of 20% I will receive on my additional contributions I pay into my pension?
2. I understand I can apply to HMRC for additional relief above the 20% I get automatically. How does this work? Do HMRC refund me the cash following my tax return or does it work another way?

Hoping someone can advise me as slightly confused despite reading alot online on this topic.

Cheers
Nick

strawn
Posts:57
Joined:Fri Jun 01, 2012 10:11 am

Re: Higher rate tax payer pension relief

Postby strawn » Sun Jun 20, 2021 6:03 pm

Say your taxable earnings are £125k per annum and you want to reduce them to £100k. If your employer offers a salary sacrifice pension scheme, use that and simply arrange that he pays £25k straight into your pension.

If not: then you want £25k gross contributed to a pension. Contribute £20k net and the pension provider will claim back £5k from HMRC and add it to your pension pot.

Then you report to HMRC that you have contributed £25k gross to a pension (N.B. report the gross amount). They will calculate how much tax relief you are due and send it to your bank account or refund it by reducing your tax payments. In other words this bit of the tax relief accrues to you not to your pension pot.

hackneyblueboy
Posts:2
Joined:Sun Jun 20, 2021 9:54 am

Re: Higher rate tax payer pension relief

Postby hackneyblueboy » Mon Jun 21, 2021 1:54 pm

Ok great thanks.

So my understanding is that either you get the full relief by salary sacrifice or you claim the higher rate relief by filing a tax return and will broadly receive the same tax benefits either way?

Is the first method preferencial as it stops your allowance being eaten into by lowering your salary or do both methods have the same effect?

Cheers
Nick

robbob
Posts:3100
Joined:Wed Aug 06, 2008 4:01 pm

Re: Higher rate tax payer pension relief

Postby robbob » Mon Jun 21, 2021 6:43 pm

Is the first method preferencial as it stops your allowance being eaten into by lowering your salary or do both methods have the same effect?
Practicably speaking both are the same from a tax perspective there may be saving from NI though on salary sacrafice . Note you do have to be careful its gross value of contributions ending up in your pot that you are comparing though !! strawn has kindly done the maths here for you though.

Do also watch out for limits that you can add into your pension this tax year.

Note also between 100k and 125k(and a bit) "adjusted Net income" your marginal rate of tax will actually be 60% due to removal of perosnal allowance so you get 40% extra back (60% in total if you add in 20% added into pension pot) if you are in this taper zone before you factor in your contribution !!!!
Ie if you contribute £8k direct £10k ends up in your pension (with added 2k) and you get £4k tax rebate - net cost of getting £10k into pension = £4k - quick get it before it goes in the next budget :)


Note you have to be in this taper zone to qualify for this brucie bonus ie if income = 140k you would pay 15k into pension with normal higher rate relief given before you get the higher relief on those extra contributions that reduce your income in that taper zone.



https://www.gov.uk/guidance/adjusted-net-income


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