# Pensions and Tax Question

T

#### Thomas

Hello

Suppose I earn £E per annum. How much would I need to pay into my personal
pension in order to pay zero net tax that tax-year?

As I understand it, payments from earnings into a personal pension are tax
free. So on this basis I can add the payment I make into my pension, to my
other tax-free allowances (in my case just a personal allowance of £6,035 )
and then calculate my tax bill as normal using my 20% and 40% bands. On this
basis I can then calculate the amount of pension contribution £P which
results in a zero tax bill.

But this is complicated by the fact that my pension company reclaims tax at
the basic 20% rate and adds that to my pension contribution - so that my £P
is increased by 0.25 to £(1.25xP). Since the tax man has now given me
£(0.25xP) I now need to pay this back as tax in order to end up with net
zero contribution to the tax man. IOW, my tax bill will actually be
£(0.25xP) and not zero.

Does this sound right and is there a better way of doing this?
Also, am I right in assuming that I can only benefit in tax relief on my
pension up to my net taxable earnings? What happens if I pay more than my
net taxable earnings into my pension (by using savings say) ?

Thanks for any help.
Thomas

T

#### Thomas

Looking at this another way.....

If I pay all of my taxable earnings (ie gross earnings minus tax-free
allowance) into my personal pension then can I expect my total tax bill for
that year to be equal to the difference between my net contribution and the
gross amount that goes into my fund in that year?

Am I allowed to pay in more than my total taxable earnings in one year and
if so does the above tax calculation still apply?

Where do NI contributions fit into this?

Thanks for any help
Thomas

A

#### Andy Pandy

Thomas said:
Looking at this another way.....

If I pay all of my taxable earnings (ie gross earnings minus
tax-free allowance) into my personal pension then can I expect my
total tax bill for that year to be equal to the difference between
my net contribution and the gross amount that goes into my fund in
that year?

Am I allowed to pay in more than my total taxable earnings in one
year and if so does the above tax calculation still apply?
The maximum gross pension contribution is 100% of your earnings - that
excludes unearned income eg interest/dividends.

So if you earn £50,000 you can pay £50,000 gross into your pension, ie
£40,000 net.

The pension company will reclaim 20% tax, you can claim higher rate
relief via your tax return/tax code. The way HRMC calculate your tax
due is to extend your basic rate band by your gross pension
contribution - this gives you the higher rate relief.

Note that you get tax relief on the whole lot, even the part within
the personal allowance, so if you pay 100% of your earnings into your
pension you get more tax relief than you paid tax!
Where do NI contributions fit into this?
They don't. If you want to avoid NI contributions you need to persuade
your employer to pay direct into your pension scheme - that saves both
you and them NI.

T

#### Thomas

Andy Pandy said:
The maximum gross pension contribution is 100% of your earnings - that
excludes unearned income eg interest/dividends.

So if you earn £50,000 you can pay £50,000 gross into your pension, ie
£40,000 net.

The pension company will reclaim 20% tax, you can claim higher rate relief
via your tax return/tax code. The way HRMC calculate your tax due is to
extend your basic rate band by your gross pension contribution - this
gives you the higher rate relief.
Thanks a million, that's really useful.
I hadn't appreciated that the maximum I can pay in is 80% of gross earnings
not 100% - makes sense I suppose.

So, is something along the following lines possible.

-I am over 55 with an existing pension pot of £400k, and a gross annual
income of £100k.

-At the end of tax year 2009/2010 I pay £80k into my pension fund reducing
my net annual income by £53k after allowing for reduced taxation.

-At the begining of tax year 2010/2011 I withdraw £50k as a tax-free lump
sum from my pension effectively restoring my net annual income.

-Thus, at no net cost to me I have increased my pension pot by £50k. (ok the
cost is a reduction in the size of any future tax free lump sum)

Is there any reason why I can't so the above?

Plus, if I understand correctly, I will still have 1/2 or £200k of my
pension fund which has not been converted (or whatever the term is) so I can
do the same trick the following year if my income and savings permit.

Many Thanks
Thomas

P

#### PeterSaxton

Thanks a million, that's really useful.
I hadn't appreciated that the maximum I can pay in is 80% of gross earnings
not 100% - makes sense I suppose.

So, is something along the following lines possible.

-I am over 55 with an existing pension pot of £400k, and a gross annual
income of £100k.

-At the end of tax year 2009/2010 I pay £80k into my pension fund reducing
my net annual income by £53k after allowing for reduced taxation.

-At the begining of tax year 2010/2011 I withdraw £50k as a tax-free lump
sum from my pension effectively restoring my net annual income.

-Thus, at no net cost to me I have increased my pension pot by £50k. (ok the
cost is a reduction in the size of any future tax free lump sum)

Is there any reason why I can't so the above?

Plus, if I understand correctly, I will still have 1/2 or £200k of my
pension fund which has not been converted (or whatever the term is) so I can
do the same trick the following year if my income and savings permit.

Many Thanks
Thomas
Don't forget to take into account your personal allowances.

T

#### Thomas

Don't forget to take into account your personal allowances.
In what respect?
Do you mean that I can add this to my total earnings when calculating how
much I can pay into my pension in a year?

Thanks
Thomas

J

#### jacovsamuel

'Thomas[_2_ said:
;94189']Hello

Suppose I earn £E per annum. How much would I need to pay into m
personal
pension in order to pay zero net tax that tax-year?

As I understand it, payments from earnings into a personal pension ar
tax
free. So on this basis I can add the payment I make into my pension, t
my
other tax-free allowances (in my case just a personal allowance o
£6,035 )
and then calculate my tax bill as normal using my 20% and 40% bands. O
this
basis I can then calculate the amount of pension contribution £P whic

results in a zero tax bill.

But this is complicated by the fact that my pension company reclaim
tax at
the basic 20% rate and adds that to my pension contribution - so tha
my £P
is increased by 0.25 to £(1.25xP). Since the tax man has now given me
£(0.25xP) I now need to pay this back as tax in order to end up wit
net
zero contribution to the tax man. IOW, my tax bill will actually be
£(0.25xP) and not zero.

Does this sound right and is there a better way of doing this?
Also, am I right in assuming that I can only benefit in tax relief o
my
pension up to my net taxable earnings? What happens if I pay more tha
my
net taxable earnings into my pension (by using savings say) ?

Thanks for any help.
Thomas
There is no investment ceiling. But the minimum investment limit ha
been fixed at Rs 500 a month or Rs 6,000 annually. Subscribers ar
required to contribute at least once a quarter but there is no ceilin
on how many times you invest during the year

A

#### Andy Pandy

Thomas said:
Thanks a million, that's really useful.
I hadn't appreciated that the maximum I can pay in is 80% of gross
earnings not 100% - makes sense I suppose.

So, is something along the following lines possible.

-I am over 55 with an existing pension pot of £400k, and a gross
annual income of £100k.

-At the end of tax year 2009/2010 I pay £80k into my pension fund
reducing my net annual income by £53k after allowing for reduced
taxation.
It would reduce it by about £69k. Your basic rate band would be
extended so that you pay no HRT - so you'd save about £11k in tax.
-At the begining of tax year 2010/2011 I withdraw £50k as a tax-free
lump sum from my pension effectively restoring my net annual income.

-Thus, at no net cost to me I have increased my pension pot by £50k.
(ok the cost is a reduction in the size of any future tax free lump
sum)
If you withdraw your net contribution of £69k your pension pot has
increased by £31k at no cost to you - that's just the benefit of the
TFLS.

T

#### Thomas

Andy Pandy said:
It would reduce it by about £69k. Your basic rate band would be extended
so that you pay no HRT - so you'd save about £11k in tax.

If you withdraw your net contribution of £69k your pension pot has
increased by £31k at no cost to you - that's just the benefit of the TFLS.
Thanks a million.

I think I got the figures a bit wrong last time but I think I must still be
going wrong somewhere.

According to:

http://listentotaxman.com/

If I earn £100k and pay nothing into my pension I take home £65k.
If I earn £100k and pay £50k (which grosses up to £62.5k) into my pension I
take home £35k.
So the cost of putting £62.5k into my pension is £30k. If I take this £30k
back out of my pension I'm left with a net £32.5k at no cost.
If I do this the next year I have added £65k at no cost.

Does that sound about right?

Thanks Thomas

P

#### PeterSaxton

In what respect?
Do you mean that I can add this to my total earnings when calculating how
much I can pay into my pension in a year?

Thanks
Thomas
If your income is £6,475 there is no tax advantage in paying into a
pension so you have to take that into account.

R

#### Ronald Raygun

PeterSaxton said:
If your income is £6,475 there is no tax advantage in paying into a
pension
Isn't there? I thought you could pay up to £2880 pa into a personal
stakeholder pension, and the taxman will gross this up to £3600, even if
you have no taxable income.

Or has this (and the "immediate vesting" option for over 50s) been
discontinued?

A

#### Andy Pandy

Ronald Raygun said:
Isn't there? I thought you could pay up to £2880 pa into a personal
stakeholder pension, and the taxman will gross this up to £3600,
even if
you have no taxable income.
You can. In a RAS scheme you get 20% tax relief even if you don't pay
tax.
Or has this (and the "immediate vesting" option for over 50s) been
discontinued?
Nope. But watch the PBR next month...

A

#### Andy Pandy

Thomas said:
Thanks a million.

I think I got the figures a bit wrong last time but I think I must
still be going wrong somewhere.

According to:

http://listentotaxman.com/

If I earn £100k and pay nothing into my pension I take home £65k.
If I earn £100k and pay £50k (which grosses up to £62.5k) into my
pension I take home £35k.
No. That's for £50k gross not net. £40k net. Gives you an extra £10k
HRT relief, so reducing your take home by £30k.

Pension contribution amounts are usually quoted gross not net - IIRC
the tax return asks for gross figures and so I guess does the above
web site (though I CBA to check).