Consider Before Tax Year End 25k Pension Fund Costs 10k
Published / Last Updated on 22/02/2020
Pension tax relief may change in the budget but whether it does or not, there is still a huge reason for higher earners to pay into pension schemes.
income of between £100,000 and £125,000 have their basic personal allowance £12,500 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 £12,500 for 2019/20, an adjusted net income of £125,000 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 £20,000 net into a pension (£25,000 with tax relief) this means the gross income is reduced to £100,000 thereby getting your full £12,500 personal allowance back.
Without pension contribution
- Earnings £125,000 less Personal allowance £Nil = Taxable income £125,000
- Taxable @ 20% on £37,500 = £7,500
- Taxable @ 40% on £87,500 = £35,000
- Total tax bill £42,500.
- £125,000 less tax £42,500 = Net income after tax £82,500.
With £20,000 net (£25,000 gross) pension contribution
- Earnings £125,000 less Personal allowance £12,500 = Taxable income £112,500
- Taxable @ 20% on £37,500 = £7,500
- Taxable @ 40% on £75,000 = £30,000
- Total gross tax bill £37,500
- Less additional tax refund on pension payment as 40% tax payer £5,000
- Total net tax bill £32,500
- £125,000 less £20,000 (net pension payment) less tax paid £32,500 = Net income after tax (and pension) £72,500.
Summary £10,000 lower income but have £25,000 in pension fund that’s 60% tax relief.
