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Where Taxpayers and Advisers Meet

Self assessment - credit balance

someone
Posts:714
Joined:Mon Feb 13, 2017 10:09 am
Re: Self assessment - credit balance

Postby someone » Wed Jun 12, 2024 6:27 pm

Thanks for explaining that. My key takeaway from the expanded detail on scenario 2 is that if you put in 12k of your own money, you will eventually end up with 20k. That equates to 65% "free money".
The percentage depends on how you calculate it.
As a proportion of your take home pay it's 8/12 = 66% tax relief. As a proportion of your earnings it's 40% tax relief in both scenarios.

You earned 20K. You paid 40% tax, leaving you with 12K. You paid that 12K into a pension plus an additional 4K - You got the 4K back from the tax man - so the net cost to you is 12K and the pension company reclaimed another 4K, so there's 20K in the pension.

The only difference between scenario 1 and scenario 2 is that in scenario 1 you pay the 4k into the pension before the taxman repays it to you - but it all goes in in year 1. In scenario 2 you only pay it in once the taxman has refunded it so it takes many years to converge.

If you pay into the pension in late March and submit your tax return in early April you can have the extra money back by mid May in scenario 1.


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