Tax Calculator | P2P Independent Forum

Tax Calculator Mar 27, 2017 21:39:04 GMT

Quote

Post by pikestaff on Mar 27, 2017 21:39:04 GMT

Mar 27, 2017 8:51:55 GMT will said:

Mar 27, 2017 7:37:43 GMT pikestaff said:

The calculator is assuming that you pay £10,000 cash to your pension provider. That amount is net of basic rate tax. Your pension provider will reclaim £2,500 basic rate tax on your behalf making a gross contribution of £12,500. You claim an additional 20% of £12,500 = £2,500 back through your tax return.

If your intention is to make a gross contribution of £10,000 you need to reduce the cash payment to £8,000. Your pension provider will then reclaim £2,000 basic rate tax leaving you to claim the other £2,000 through your tax return.

In case relevant, you should be aware that the annual allowance is calculated by reference to gross contributions.

Aah yes. That makes sense, so just to clarify one thing.

If I'm a 40% tax payer, then to earn £10,000 after tax, I need to earn £16666.67, but HMRC are only giving £5,000 back because they're using the basic rate tax rate to calculate the gross amount that needs to be earned to receive £10,000, landing them on £12,500 instead of the £16,666.67.

They then calculate the higher rate tax contribution as 20% of the £12,500, therefore giving a £2,500 tax reduction and pocketing £1,666,67 themselves?

Sort of. In your example, your gross incremental earnings are £16,666.67 and you make a gross pension contribution of £12,500 leaving you with net incremental earnings of £4,166.67, on which the tax at 40% is £1,666.67.

To use up all the incremental earnings you need to make a contribution of £13,333.33 net of basic rate tax (£16,666.67 gross). To fund this you will have to "borrow" £3.333.33 from your general resources, which you will get back when you do your tax return.