Higher rate pension relief calculation

[Femi]

Having taken redundancy and ‘retired’ this year my salary hit well over 6 figures.

I have contributed £32000 to my pension - the Sipp provider has claimed 20% relief on this which makes it £40k. I will claim back an additional £8000 higher rate relief via self assessment.my question is how does this work - what are the calculations? Does the £32k contribution reduce my taxable earnings?

Could anyone give a worked example showing how the relief is effectively delivered? My assumption is that somehow the taxable income is reduced by £40k which then reduces tax by £8k (effectively delivering the additional 20% relief.

Any worked examples (simple expalanatiom with examples) welcome … thanks in advance.

Femi

[mc2fool]

I have contributed £32000 to my pension - the Sipp provider has claimed 20% relief on this which makes it £40k. I will claim back an additional £8000 higher rate relief via self assessment.my question is how does this work - what are the calculations? Does the £32k contribution reduce my taxable earnings?

The Self Assessment form asks you to enter "Payments to registered pension schemes where basic rate tax relief will be claimed by your pension provider (called ‘relief at source’). Enter the payments and basic rate tax".

So you'll stick in £40,000 and it will raise your higher rate tax threshold by that amount, so you'll only pay 20% on that £40K instead of 40%, effectively giving you relief of £8,000 (in addition to the £8,000 given at source by your SIPP provider).

[Femi]

So you'll stick in £40,000 and it will raise your higher rate tax threshold by that amount, so you'll only pay 20% on that £40K instead of 40%, effectively giving you relief of £8,000 (in addition to the £8,000 given at source by your SIPP provider).

So assuming some hypothetical figures would this calc be correct:

Income (Various sources) £110,000
Pension contributions £40,000
Adjusted Income £70,000

Tax Free £7570?? = £0
20% Tax £37,700 = £7,540
40 Tax £24,730 = £9,892

Total tax to pay: £17,432


Or - would it be

Income (Various sources) £110,000

Tax Free £7570 = £0
20% Tax £77,700 = £15,540
40 Tax £24,730 = £8,151.32

Total tax to pay: £23,691.32


Also - does the £32k (40k) effectively reduce my taxable income to £70,000 in the scenario above (and thus avoid taper on the personal allowance)?

Sorry for the add on questions - the scenario's above end up in different tax payable and I'm trying to ascertain what the likely tax rebate might be as I paid a large amount of tax on the redundancy payment.

Much appreciate the help in understanding

[mc2fool]

Income (Various sources) £110,000

Tax Free £7570 = £0
20% Tax £77,700 = £15,540
40 Tax £24,730 = £8,151.32

Total tax to pay: £23,691.32

Also - does the £32k (40k) effectively reduce my taxable income to £70,000 in the scenario above (and thus avoid taper on the personal allowance)?

Good point, and yes and no. It does reduce your adjusted net income on which your personal allowance is based, but not your overall taxable income, the £40,000 just affects the higher rate threshold for that. So, as per your example above except that the amount you'll pay 40% on is £19,730.

https://www.gov.uk/guidance/adjusted-net-income
https://www.hl.co.uk/pensions/tax-relief/calculator
https://www.which.co.uk/money/pensions- ... gp51p666u6

I'm trying to ascertain what the likely tax rebate might be as I paid a large amount of tax on the redundancy payment.

You are aware that the first £30,000 of any redundancy payment is tax free? https://www.gov.uk/termination-payments ... eave-a-job

[Femi]

I've been reading the gov.uk website and I think I have worked out how it works now:

So in my scenario above

Income is £110,000
Pension contributions £40,000
Adjusted income is £70,000

This means taper relief on the personal allowance is avoided and the full £12,570 is available.

Tax:

Tax Free: £12,570
20% payable on £77,700 (£37,700+£40,000): £15,540
40% payable on £19,730 (£110,000-£12,570-£77,700) : £7,892

Tax to pay is: £23,432

[Femi]

You are aware that the first £30,000 of any redundancy payment is tax free? https://www.gov.uk/termination-payments ... eave-a-job

Yes, I've already accounted for that by reducing the actual income by £30k - so in my scenario the actual income would have been £140,000. Perhaps I should not do that? Will it affect the calcs? I don't think so? Maybe there would be some benefit in using some of last years unused pension contribution allowance to ensure the adjusted income in the following scenario drops below £100,000?

Income is £140,000
Pension contributions £40,000
Adjusted income is £100,000

This means taper relief on the personal allowance is avoided and the full £12,570 is available.

Tax:

Tax Free: £42,570 (Personal allowance + £30,000 redundancy)
20% payable on £77,700 (£37,700+£40,000): £15,540
40% payable on £19,730 (£110,000-£12,570-£77,700) : £7,892

Tax to pay is: £23,432

[Femi]

If this is correct then I believe I could put additional funds into the pension using last years unused contribution limit - whilst this would clearly be beneficial in all scenarios (due to the tax relief) it would be particularly so where I were able to claim the additional relief (up to 40%) - so an additional £19,730 (including the relief claimed by the SIPP - so actual contribution of £15,784) ... in my scenario above. If this is correct then I will consider doing that

mc2fool - thanks for taking the time to explain it in terms I could get my head round. This stuff is mind numbing

[Femi]

I found this helpful also - hope it is ok to link to this:

https://adviser.royallondon.com/globala ... y-2022.png

[mc2fool]

If this is correct then I believe I could put additional funds into the pension using last years unused contribution limit - whilst this would clearly be beneficial in all scenarios (due to the tax relief) it would be particularly so where I were able to claim the additional relief (up to 40%) - so an additional £19,730 (including the relief claimed by the SIPP - so actual contribution of £15,784) ... in my scenario above. If this is correct then I will consider doing that

mc2fool - thanks for taking the time to explain it in terms I could get my head round. This stuff is mind numbing

Yeah, but look, rather than relying on some bloke on some forum on the internet, why not go to the horses mouth...

I take it you have an online self assessment login account -- if not, get yourself one! -- so just go to that and start filing for last year, putting in all your numbers as you like, and then at the 95% point it will tell you how much tax you'll be levied, and let you view the details of the calculation. You don't need to actually submit it to get that info, and can always go back and change any numbers willy nilly until you do decide to submit it. The thresholds for this year are the same as last, so the result should be the same.

If you've already submitted for last year you can tell if you want to revise it, and then do so in order to get the bottom line figure you're after, and then just back out from the revision.

[Femi]

That's a good suggestion, I'll take a look - I don't usually get involved as my accountant deals with it all at the same time as they do my property rental portfolio accounts. I was just trying to create a simple spreadsheet modelling tool for in year forecasting use.

Thanks again.