Many higher-rate taxpayers fail to maximise tax relief on their pension contributions because they don't understand how it is calculated, says Nick Braun in Business Tax Saver.
The maximum higher-rate relief you can claim is your "gross pension contribution x 20%" and you can only claim it if you have at least this much income taxed at 40%. To maximise your relief, you must ensure your gross contributions do not exceed the amount of income you have taxed at 40%.
Take Sandy, who earns £50,000. He has £7,525 of income taxed at 40% (£50,000 - £42,475). He puts £15,000 into a pension; HMRC adds £3,750 of basic-rate relief, making his gross contribution £18,750. But since Sandy only has £7,525 taxed at 40%, he can only claim £1,505 of relief (£7,525 x 20%) and loses out on £2,245 of higher-rate relief (£18,750 -£7,525 x 20%).
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Spreading his contribution over several years would avoid this. To maximise relief, make a gross contribution of no more than "your taxable income minus £42,475". Multiply this by 0.8 to obtain the maximum amount you can invest.
-
Barclays begins paying up to £100 compensation to customers after banking outageBarclays will pay up to £7.5 million in compensation to customers after its banking services were disrupted by an IT outage
-
Review: Shangri-La Paris – an ode to the world’s best foodNatasha Langan enjoys fine French and Chinese cuisine at the Shangri-La Paris
