Tax Code Query - Pension Contributions

Can someone explain how the tax code works for pension contributions

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Example - Scottish Income and Tax Code

Income £49,500

Pension Contributions Gross £10,000 (employee contributions)

Tax Code S1570L

Within the Tax Code is a £3000 allowance for pension contribtions

It appears the right amount of tax has been paid - i.e. no higher rate tax has been paid as the pension contribtuions take the income below the Scottish higher rate threhold of £43,633.

However, I want to understand how this works as only £3,000 has been adjusted in the tax code. 

Thanks

 

 

Replies (3)

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By Not Anonymous
05th May 2023 10:16

For a Scottish taxpayer I don't believe you will be able to easily calculate that without knowing what HMRC's estimate of their (taxable) pay would have been when calculating the tax code.

What the coding allowance is intended to do is is ensure the additional relief due, which could be on intermediate and higher rates in this case, is given by an increase in the tax code allowances.

The other part of the equation is how much income they will get from the organisation operating the tax code.

In a very simple (non Scottish) scenario someone with taxable pay of say £80,000 and contributing £10,000 gross to a RAS scheme would have received £2,000 in basic rate tax relief in their pension fund and the extended basic rate band would result in a personal tax saving of £2,000.

In that case a tax code allowance of £5,000 would be needed. The end result of this is that the employer would not deduct tax from an additional £5,000 of the earnings, which would otherwise have been taxed at 40%.

£5,000 x 40% = £2,000, the personal tax savings due from the gross contribution.

Unfortunately though life is far more complicated for a lot of Scottish taxpayer's.

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Replying to Not Anonymous:
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By accountaholic
05th May 2023 13:03

Not Anonymous wrote:

Unfortunately though life is far more complicated for a lot of Scottish taxpayer's.

And tax is only one of the complications!

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By gillybean04
05th May 2023 12:58

I am not sure if you have given exact figures but broadly, £3,000 in the tax code will be given relief at the marginal rate. This will result in £1,260 less tax paid than if there was no pension relief in the code. The amount of £1,260 actually refunded divided by the difference between basic rate and marginal rate (22%) will give £5,727. All presuming it is the current year.

£5,727 added to the higher rate threshold of £43,663 will give £49,390.

The difference could be, as alluded to by Not Anonymous, due to a difference in estimated income. If you have rounded any figures then it is probably due to that rounding. Or possibly even a combination of both.

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