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42% tax relief on personal pension contributions?

42% tax relief on personal pension contributions?

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A client has taxable income of approximately £60,000 of which £2000 is savings income. A personal pension contribution of £27,215 (gross) was paid to eliminate the higher rate liability for 2000/01. As the contribution was paid under deduction of basic rate tax (22%), we were anticipating a refund of 18%. However, the actual refund was higher than this. The reason? As relief is given by extending the basic rate band, any relief which results in savings income no longer being taxed at higher rates, reduces the rate to 20%, ie an additional 20% relief.

This seems to be correct according to the legislation. Has anyone else come accross this in practice or had it queried by the Inland Revenue?
Nicola Stone

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By AnonymousUser
09th Mar 2002 00:37

42% tax relief on personal pension contributions? No, higher!
Not sure what the overall relief comes to, but you can get even higher than 44.5% relief if the contribution is also bringing the taxpayers income down for the purposes of them being able to claim Childrens Tax Credits.

Reason? CTC is reduced by £x for every £y that the taxpayer goes into the HR tax bracket (not sure of x and y without looking them up...)

Maybe this what you are thinking of, in respect of 48% tax relief??!

Shane

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By 2156806
01st Mar 2002 14:17

Yes it Works
Have had this in the past. Had to explain it in detail to one inspector but he did approve the refund in the end.

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By AnonymousUser
28th Feb 2002 17:15

Always has been
No need to worry Nicola, the relief has always worked in this way.

Out of interest try £60,000 of dividend income only with no savings etc. Any advance on 44.5% effective relief ?

Nick Hinman

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By AnonymousUser
01st Mar 2002 10:17

What about somewhere in the region of 50%
Can't tell you how it is done at present but I've heard a rumour floating about that it can be done.

There is a further, potentially huge, saving that can be made. Take the example of someone who cashed an investment bond on which they would usually get top slicing relief. If in the year they encash it the slice lands in 40% then the tax is going be levied in full - no TSR. But pay enough of a pension to extend the band far enough and voila no tax. This begs the question would you know about it before it is too late!

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By AnonymousUser
01st Mar 2002 14:33

Look out for pension/CGT planning too
I'm not sure about 50%

The effective rate is (currently) 22% plus the marginal rate on income excluded from the HR band. In Nicola's case this was 22+20=42%. My example was of 22+22.5=44.5%. I have tried hard but cannot think of any income chargeable at a marginal rate of 28%. Any offers ?

Worthy of note is that Capital Gains are the top of the top slices and charged at the 20% marginal savings rate. A pension premium could thus enjoy 42% effective relief in relevant cases.

Nick Hinman

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