Simon earns £60,000 and pays £400 per month into his personal pension.
Simon is a Higher Rate Taxpayer and will make a net personal contribution of £240 per month.
This is because he will make his payments net of Basic Rate Tax (20%).
He is also entitled to Higher Rate Tax Relief of an additional 20% on the gross contribution of £400, which will be reclaimed via his Self-Assessment Return or by adjustment to his tax code.
Simon benefits from 20% tax relief upfront and the Pension Provider reclaims this from HMRC and adds it to his plan and the additional 20% comes back to him as a tax rebate – which means that overall he will personally pay £240 per month and benefit from £160 of tax relief, giving the required £400 per month contribution to his plan.
Pension Tax Relief Case Study 2
Fiona is the owner of her own Limited Company.
She has a Pension Plan which she has not paid into for some years and would like to invest some of the profits of her business to help offset her Corporation Tax. Additionally, she would like to be able to tax-efficiently draw capital from the business when she sells at retirement.
Fiona has been advised a £100,000 contribution to her pension from her Limited Company is the most tax efficient method.
In the tax year 2020/21 Fiona’s full £40,000 annual allowance (A) is available.
In addition, she has unused annual allowances that she can carry forward from the three previous tax years. Starting with the earliest year first, she can carry forward £40,000 (B) annual allowance from 2017/18 and the balance of £20,000 (C) from 2018/19. This enables the full £100,000 (A+B+C) contribution to be made without incurring an annual allowance tax charge.
Her Company will benefit from corporation tax relief on the contribution in the tax year 2020/21.
Alternatively, instead of the company making the contribution, Fiona can make personal contributions using the same method, up to a maximum of 100% of her salary if appropriate, subject to HMRC qualifying income conditions.
However, this would potentially be less tax efficient as her salary will be assessed for Income Tax and National Insurance first.
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