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HMRC internal manual

Pensions Tax Manual

From
HM Revenue & Customs
Updated
, see all updates

Annual allowance: tax charge: rate of tax charge: worked examples

Example where contributions paid using net pay arrangement
Example where contributions paid using relief at source RAS

Assume for the purposes of these examples that the normal basic rate limit is £37,400 and the normal higher rate limit is £150,000.

Example where contributions paid using net pay arrangement

Siva is a member of her employer’s final salary pension scheme. Each year she pays a contribution of 6 per cent of her salary. This contribution is paid using the net pay arrangement. Siva’s salary is £150,000 so her 6 per cent contribution is £9,000.

Siva also has taxable investment income of £2,500.

At the end of the year Siva decides to increase her pension benefits by paying a one-off contribution of £31,000. Siva pays this amount direct to the pension scheme.

As Siva had a large pay rise that increased her pension significantly, she has £15,000 pension saving on which the annual allowance is due.

During the tax year Siva also makes a Gift Aid donation with a gross value for tax purposes of £1,000.

Siva’s pension contributions reduce her taxable income to £112,500 (£150,000 + £2,500 - £9,000 - £31,000).

Siva has a personal allowance of £225. This means her ‘reduced net income’ is £112,275.

The £1,000 Gift Aid donation Siva made increases her basic and higher rate limits to £38,400 and £151,000.

Adding together Siva’s £15,000 pension saving to her £112,275 reduced net income gives a total of £127,275.

All of Siva’s pension saving is above her basic rate limit but below her higher rate limit. So the £15,000 pension saving will be taxed at 40 per cent.

The amount of Siva’s annual allowance charge is £6,000 (£15,000 @ 40 per cent).

Example where contributions paid using relief at source RAS

Alan earns £150,000. He also has taxable savings income of £2,500. This means Alan has total taxable income at this stage of £152,500.

Each year Alan makes a £32,000 net contribution to his personal pension scheme that uses RAS. This has a gross value for tax purposes of £40,000. Alan’s employer also pays into the scheme. As a result Alan has £15,000 pension saving on which the annual allowance charge is due.

Although Alan’s contribution under RAS does not reduce his taxable income it is taken into account when deciding if he has a personal allowance. Alan has a personal allowance of £225.

During the tax year Alan also makes a Gift Aid donation with a gross value for tax purposes of £1,000.

Alan’s ‘reduced net income’ is £152,275 (his £152,500 taxable income less his £225 personal tax allowance).

The £40,000 pension contribution and £1,000 Gift Aid donation increases Alan’s basic rate limit and higher rate limit. Alan’s basic rate limit becomes £78,400 and his higher rate limit £191,000.

Alan’s reduced net income of £152,275 added to his £15,000 taxable pension saving is £167,275.

Alan’s £15,000 is all above his basic rate limit but below his £191,000 higher rate limit. So His pension saving will be taxed at 40 per cent.

The amount of Alan’s annual allowance charge is £6,000 (£15,000 @ 40 per cent).

Both Alan and Siva have the same level of income. Both have made pension contributions of £40,000 and a Gift Aid donation of £1,000. As they make their contributions by different payment methods they have different amounts of ‘reduced net income’. But the end result - the amount of their annual allowance tax charge - is the same.