Pension contributions savings

A. Pension contributions for individual earning between 50k and 60k and paying high income benefit charge

We wish to demonstrate the savings by an example below. Say, Jack earns 55k a year and pays high income benefit charge.  We have prepared his tax calculation showing two scenarios one without and one with pension contributions.

	Tax without Pension			Tax with Pension
Income	55,000			55,000
Less: Personal Allowance	12,570			12,570
Taxable Income	42,430			42,430
	Rate	Band	Amount	Rate	Band	Amount
Tax Payable	20%	37,700	7,540	20%	40,2001	8,040
	40%	4,730	1,892	40%	2,230	892
	Total	42,430	9,432		42,430	8,932
High income child benefit	5665			2835
Tax due	9,998			9,215
Tax savings	7832
Pension top up	5003
Total savings	1,283

Notes:

1. Say, Jack makes a pension contribution of 2,000 with HMRC top up of 20% it is grossed up to 2,500 (2000 divided by 0.80). His basic rate band increases from 37,700 to 40,200 (37,700 + 2,500)
2. Difference between 9,998 and 9,215.
3. 20% pension top-up claimed by the Pension company on tax payer’s behalf.
4. Thus, on a pension contribution of 2,000; Jack saves 1,283 that is c64%
5. High Income child benefit computation

Gross Income	55,000	55,000
Less: Gift Aid	0	0
Less: Pension contribution	0	2,500
Adjusted net income	55,000	52,500
Less: Threshold	50,000	50,000
Net	5,000	2,500
Dividend by 100	50%	25%
Child benefit received	1,133	1,133
High income child benefit	566(50% of 1,133)	283(25% of 1,133)

B. Pension contributions for individual earning between 100k and 125k

	Tax without Pension			Tax with Pension
Income	105,000			105,000
Less: Personal Allowance	10,0701			12,570
Taxable Income	94,930			92,430
	Rate	Band	Amount	Rate	Band	Amount
Tax Payable	20%	37,700	7,540	20%	40,2002	8,040
	40%	52,230	22,892	40%	53,480	21,892
	Total	94,930	30,432		42,430	29,432
Tax savings	10003
Pension top up	5002
Total savings	1,500

Notes:

1. Reduced Personal allowance computation

Gross Income	105,000	105,000
Less: Pension contribution	0	2,500
Adjusted net income	105,000	102,500
Less: Threshold	100,000	100,000
Net	5,000	2,5002
Divided by 2	2,500	1,250
Standard Personal allowance	12,570	12,570
Reduced Personal allowance	10,070	11,320

• Say, Jack makes a pension contribution of 2,000 with HMRC top up of 20% it is grossed up to 2,500 (2000 divided by 0.80). His basic rate band increases from 37,700 to 40,200 (37,700 + 2,500)
• Thus, on a pension contribution of 2,000; Jack saves 1,500 that is c75%
  
  C. Pension contributions for individual earning over c125k

	Tax without Pension			Tax with Pension
Income	130,000			130,000
Less: Personal Allowance	0			0
Taxable Income	130,000			130,000
	Rate	Band	Amount	Rate	Band	Amount
Tax Payable	20%	37,700	7,540	20%	40,2002	8,040
	40%	92,300	36,920	40%	89,800	35,920
	Total	130,000	44,460		42,430	43,960
Tax savings	5003
Pension top up	5002
Total savings	1,000

Notes:

1. Say, Jack makes a pension contribution of 2,000 with HMRC top up of 20% it is grossed up to 2,500 (2000 divided by 0.80). His basic rate band increases from 37,700 to 40,200 (37,700 + 2,500)
2. Thus, on a pension contribution of 2,000; Jack saves 1,000 that is c50%

Point to note:

1. Pension contribution needs to be made in the tax year i.e. before 5^th April 2023 to take benefit of these savings for the tax year ended 5^th April 2023. This means tax relief can be claimed for a contribution only in the tax year in which payment is made. FA 2004 Sec 188 (1)

• Salary sacrifice pension contributions are even more beneficial as tax payer saves both tax and National insurance.