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
Higher rate pension relief calculation
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- Lemon Half
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Re: Higher rate pension relief calculation
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".Femi wrote: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?
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).
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Re: Higher rate pension relief calculation
So assuming some hypothetical figures would this calc be correct:mc2fool wrote: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).
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
![Smile :)](./images/smilies/icon_e_smile.gif)
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- Lemon Half
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Re: Higher rate pension relief calculation
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.Femi wrote: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)?
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
You are aware that the first £30,000 of any redundancy payment is tax free? https://www.gov.uk/termination-payments ... eave-a-jobFemi wrote:I'm trying to ascertain what the likely tax rebate might be as I paid a large amount of tax on the redundancy payment.
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- Posts: 23
- Joined: January 20th, 2022, 10:28 pm
Re: Higher rate pension relief calculation
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
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
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- Posts: 23
- Joined: January 20th, 2022, 10:28 pm
Re: Higher rate pension relief calculation
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?mc2fool wrote:You are aware that the first £30,000 of any redundancy payment is tax free? https://www.gov.uk/termination-payments ... eave-a-job
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
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- Joined: January 20th, 2022, 10:28 pm
Re: Higher rate pension relief calculation
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![Smile :)](./images/smilies/icon_e_smile.gif)
mc2fool - thanks for taking the time to explain it in terms I could get my head round. This stuff is mind numbing
![Smile :)](./images/smilies/icon_e_smile.gif)
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- Posts: 23
- Joined: January 20th, 2022, 10:28 pm
Re: Higher rate pension relief calculation
I found this helpful also - hope it is ok to link to this:
https://adviser.royallondon.com/globala ... y-2022.png
https://adviser.royallondon.com/globala ... y-2022.png
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- Lemon Half
- Posts: 6209
- Joined: November 4th, 2016, 11:24 am
Re: Higher rate pension relief calculation
Yeah, but look, rather than relying on some bloke on some forum on the internet, why not go to the horses mouth...Femi wrote: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
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.
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- Posts: 23
- Joined: January 20th, 2022, 10:28 pm
Re: Higher rate pension relief calculation
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.
Thanks again.