Pension Relief at Source

How does pension relief @ source effects taxable income

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Hi everyone, I was wondering if someone could clarify how the pension relief at source effects the taxable income?

  I am filling in my self assessment and my understanding is that the total taxable income should be employment income less childcare vouchers less pension contributions.  However, my payslip and P60 show total taxable income as employment income less childcare vouchers.

My pension is a relief at source one.  So say for arguments sake I earn £1000, contribute £100 to pension.  I understand that my pension contribution gets grossed up to £120.  But does my total taxable income for tax assessment purposes stay as £1000 or is it £900?

Many thanks!

 

Replies (3)

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By Portia Nina Levin
16th Jan 2017 11:47

You are taxed on £1,000, but your basic rate band is extended by £125 (because you have already had the first 20% of your tax relief "at source").

For the purposes of personal allowance withdrawal and the high income child benefit charge it is the £875(that is what we accountants get when we take £125 away from £1,000) that is included as income.

Childcare vouchers are not a tax deduction they are just an amount of taxable salary that you have given up in exchange for receiving non-taxable childcare vouchers.

These semantics are important, and are the reason that sooner or later you will end up either paying more tax than you need to or getting an HMRC enquiry and getting royally screwed.

EDIT: Amended to correctly gross up the pension contribution to £125 per Paul, rather than the £120 offered by the OP.

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By Paul D Utherone
16th Jan 2017 11:41

Presuming it's not by salary sacrifice then your earnings are £1,000 and you make a separate claim in your return for the grossed up pension contributions of £125 (£100x100/80)

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By fullq
16th Jan 2017 12:10

Thank you both! I think I understand it now. Thank you for your help.

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