£25k Pension Fund Costs £10k Before April 2023

Tax relief has always been an incentive to save in pensions.  In addition, there is another huge reason for higher earners to pay into pension schemes before the end of the tax year.

Taxpayers with an income of between £100,000 and £125,140 have their basic personal allowance £12,570 reduced by £1 for every £2 above the income limit.  The personal allowance can be reduced to nil. 

For example, based on the basic personal allowance of £12,570 for 2022/23, an adjusted net income of £125,140 or above would mean that no personal allowance is available and taxable (non-dividend) income in that £25,000 band is effectively being taxed at 60%.

By paying £20,112 net into a pension (£25,140 with tax relief) this means the gross income is reduced to £100,000 thereby getting your full £12,570 personal allowance back.

Net Income Without this pension contribution

• Earnings £125,140 less Personal allowance £Nil = Taxable income £125,000.
• Taxable @ 20% on £37,700 = £7,540.
• Taxable @ 40% on £87,440 = £34,976.
• Total tax bill £42,516. 
• £125,140 less income tax £42,516 = Net income after tax £82,624.

Net Income With £20,112 net (£25,140 gross) pension contribution

• Earnings £125,140 less Personal allowance £12,570 = Taxable income £112,570.
• Taxable @ 20% on £37,700 = £7,540.
• Taxable @ 40% on £74,870 = £29,948.
• Total gross tax bill £37,488.
• Less an additional tax refund on £20,112 (net)/£25,140 (gross) pension payment as a 40% taxpayer of £5,028.
• Total net tax bill £32,460 (after tax refund).
• £125,140 less £20,112 (net pension payment by you) and less income taxes paid £32,460.
• = Net income after tax (and pension contribution) £72,568.

Summary After Pension Contribution:  A £10,056 lower income into your household but you have an additional £25,140 in your pension fund.  You are technically £15,084 wealthier than you would have been without the pension contribution.  That’s the equivalent of a ‘whopping’ 60% tax relief (£15,084/£25,140)%.

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