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Personal allowance and pension contributions

Can I get my PA back if I make pension contributions that bring my income below £100k?

Didn't find your answer?

Lets say I make 130k (so I have zero personal allowance, as it is reduced by £1 for every £2 you earn above £100k), and I contribute 30k into a pension pot. 

Of the 30k, the government would add an additional 20% (6k) to my pot and give me an additional 20% (6k) in my self assessment. All good. 

Anyway. For the purposes of my personal allowance, is my income 100k or 130k? Ie do I get my personal allowance back?

Replies (17)

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By Wanderer
14th Feb 2020 08:08

proudfeet wrote:

Lets say I make 130k (so I have zero personal allowance, as it is reduced by £1 for every £2 you earn above £100k), and I contribute 30k into a pension pot. 

Of the 30k, the government would add an additional 20% (6k) to my pot and give me an additional 20% (6k) in my self assessment. All good. 

Anyway. For the purposes of my personal allowance, is my income 100k or 130k? Ie do I get my personal allowance back?

Let's say if you have £130k income as a software engineer and let's say you can afford a £30k pension contribution then let's say you can afford to pay your accountant to let's say give you this advice, particularly because let's say you've already got some of your figures wrong and let's say there are other considerations that you may not be aware of.
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By MJShone
14th Feb 2020 08:54

To give you a straight answer to the question asked, and taking nothing else into account except for the facts that you've given...the only thing wrong with your numbers is that it's the gross pension contribution that you deduct from your income for the purposes of the personal allowance. So if you pay £24,000, that grosses up to £30,000. For the purposes of the personal allowance calculation only, your income is £100,000, so you "claw back" all of your personal allowance, getting relief on your pension contributions at an effective rate of 60%.

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Replying to MJShone:
ALISK
By atleastisoundknowledgable...
14th Feb 2020 10:02

MJShone wrote:

To give you a straight answer to the question asked, and taking nothing else into account except for the facts that you've given...the only thing wrong with your numbers is that it's the gross pension contribution that you deduct from your income for the purposes of the personal allowance. So if you pay £24,000, that grosses up to £30,000. For the purposes of the personal allowance calculation only, your income is £100,000, so you "claw back" all of your personal allowance, getting relief on your pension contributions at an effective rate of 60%.

Hate to be pedantic, but the net contribution was £30k, meaning gross of £36k, so the answer is “neither, income of £94k”.

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Replying to atleastisoundknowledgable...:
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By Wanderer
14th Feb 2020 10:20

Not pedantic at all, and exactly the sort of point that would be covered off if the OP sought paid for advice rather than relied on advice on an internet forum based on incomplete ambiguous information.

Also there wouldn't be effective 60% relief on the whole pension contribution.

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Replying to atleastisoundknowledgable...:
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By MJShone
14th Feb 2020 11:35

The contribution the OP mentioned was £30k net - but I'm using £24k net. Hate to be pedantic - but that's what "if" signifies.

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Replying to atleastisoundknowledgable...:
JCACE
By jcace
14th Feb 2020 13:34

If you're going to be pedantic, then you should point out that a net contribution of £30K would mean a gross contribution of £37.5K etc etc

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By Constantly Confused
14th Feb 2020 11:43

#applauds LotR reference in username of OP#

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By fawltybasil2575
14th Feb 2020 12:28

@ proudfeet (OP).

I assume that the majority of (or all) the example income of £130K represents employment and/or self-employment income.

Your initial question includes this sentence:-

“Of the 30k, the government would add an additional 20% (6k) to my pot”.

Your words “add an additional” imply that the “30k” is a NET figure. Such being the case, your statement that “the government” (in practice, HMRC) would ADD £6K is unfortunately incorrect – HMRC would actually add NOT one fifth
(20%) but ONE QUARTER (25%), ie £7,500 – this thus produces a GROSS premium of £37,500.

It is that Gross figure of £37,500 which would (normally – see my next paragraph below) be deducted from your £130,000 gross income: this would leave a net figure of £92,500, and it is that £92,500 which ensures that the £100,000 threshold is not breached (and thus "preserves" your Personal Allowance).

The above figures assume that there are no OTHER FACTORS (including, but not restricted to, somewhat complex rules re relief on pension policy premiums) which might have an impact.

Frankly, a qualified Investment Advisor, whom one would normally consult before committing oneself to a pension policy payment of £30K, should be able to advise you re the correct pension policy relief available; and a competent accountant should be able to clarify for you the taxation aspects of the £100,000 threshold upon which your question is based (some accountants are both qualified Investment Advisors and Qualified Accountants).

I feel that you should therefore avail yourself of the professional advice recommended above in view of the substantial amounts at issue.

Basil.

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Replying to fawltybasil2575:
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By Michael Davies
14th Feb 2020 14:29

Yes but how many times has the IFA ignored overcooking the pot ?

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Replying to fawltybasil2575:
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By proudfeet
15th Feb 2020 06:59

Thank you Basil for your detailed answer. Congratulations on spotting my deliberate mistake regarding gross and net :)

In conclusion, regardless of the specific figures, the gross pension contribution would indeed be netted off my gross income before calculating the personal allowance I get.

Thank you!

And yes no doubt professional advice is wise :)

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Replying to proudfeet:
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By Not Anonymous
15th Feb 2020 08:49

proudfeet wrote:

Thank you Basil for your detailed answer. Congratulations on spotting my deliberate mistake regarding gross and net :)

In conclusion, regardless of the specific figures, the gross pension contribution would indeed be netted off my gross income before calculating the personal allowance I get.

Thank you!

And yes no doubt professional advice is wise :)

And presumably you also realise those type of pension contributions don't actually reduce your "income" for tax purposes.

They only reduce your "adjusted net income".

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Replying to Not Anonymous:
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By proudfeet
17th Feb 2020 06:08

Thanks for this- I just want to make sure I understand it fully. In other words, I want to understand exactly what the difference is between 'adjusted net income' and 'income for tax purposes'.

Your 'income for tax purposes' is...well, whatever your gross income is. It is this that determines the tax band you are in. Things like pension contributions do not impact your tax bands. If I earn £160k gross but pay (gross) 20k to a pension, I remain an additional rate taxpayer, it is just that I get the extra tax back.

Whereas pension contributions DO impact your 'adjusted net income'.

And your personal allowance is based on your 'adjusted net income', not your 'income for tax purposes'.

Am I correct, or am I barking up the wrong tree again?

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Replying to proudfeet:
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By Not Anonymous
17th Feb 2020 08:36

proudfeet wrote:

Thanks for this- I just want to make sure I understand it fully. In other words, I want to understand exactly what the difference is between 'adjusted net income' and 'income for tax purposes'.

Your 'income for tax purposes' is...well, whatever your gross income is. It is this that determines the tax band you are in. Things like pension contributions do not impact your tax bands. If I earn £160k gross but pay (gross) 20k to a pension, I remain an additional rate taxpayer, it is just that I get the extra tax back.

Whereas pension contributions DO impact your 'adjusted net income'.

And your personal allowance is based on your 'adjusted net income', not your 'income for tax purposes'.

Am I correct, or am I barking up the wrong tree again?

Relief at source pension contributions (and Gift Aid payments) can affect which tax band income falls into. See reply to your next post.

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By proudfeet
17th Feb 2020 06:11

Regarding the error in gross vs net in my OP, just to make sure I understand this now, is this correct:

You earn £100k and you wish to contribute £30k (net- ie actual cash leaving your bank account) to your pension.

Of this £30k, HMRC will add an extra 25% to your pot, so your pot will now have £30k + 25% * £30k = £37.5k.

Because you are in the 40% tax band, you will be eligible to receive an extra 25% of the £30k (£7.5k) back as well, but this will not be added to your pot, you will receive it as a tax refund.

To conclude: paid £30k net, pension pot = £37.5k, receive £7.5k refund.

It cost you £22.5k to add £37.5k to your pension.

Is this correct?

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Replying to proudfeet:
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By Not Anonymous
17th Feb 2020 08:34

proudfeet wrote:

Regarding the error in gross vs net in my OP, just to make sure I understand this now, is this correct:

You earn £100k and you wish to contribute £30k (net- ie actual cash leaving your bank account) to your pension.

Of this £30k, HMRC will add an extra 25% to your pot, so your pot will now have £30k + 25% * £30k = £37.5k.

Because you are in the 40% tax band, you will be eligible to receive an extra 25% of the £30k (£7.5k) back as well, but this will not be added to your pot, you will receive it as a tax refund.

To conclude: paid £30k net, pension pot = £37.5k, receive £7.5k refund.

It cost you £22.5k to add £37.5k to your pension.

Is this correct?

There is no fixed "extra 25%". The gross pension contribution of £37.5k increases your basic rate band making more income taxable at 20% and less at 40% (slightly different if Scottish resident for tax purposes).

That may come out broadly as an £7.5k tax saving but it all depends on how much higher rate tax you would be liable at. There is a misconception that being a higher rate payer entitles you to the "extra 25%". But you may have only paid higher rate tax on £1.

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Replying to Not Anonymous:
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By proudfeet
18th Feb 2020 05:32

Not Anonymous wrote:

There is no fixed "extra 25%". The gross pension contribution of £37.5k increases your basic rate band making more income taxable at 20% and less at 40% (slightly different if Scottish resident for tax purposes).

That may come out broadly as an £7.5k tax saving but it all depends on how much higher rate tax you would be liable at. There is a misconception that being a higher rate payer entitles you to the "extra 25%". But you may have only paid higher rate tax on £1.

This makes perfect sense, thanks!

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By Matrix
17th Feb 2020 09:15

You will need to calculate your annual allowance and any unused relief brought forward to ensure this large payment falls within this year’s limit.

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