Author Topic: Idiotic misunderstanding of payslip  (Read 3074 times)

frugledoc

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Idiotic misunderstanding of payslip
« on: April 12, 2015, 02:20:48 AM »
Shame on me, very annoyed at myself.

Due to not reading and understanding my payslip correctly it was not until I received my end of year summary recently that I realised I had earned 13k more this yearthan I thought and have therefore missed the boat on paying approximately same amount into a private pension which would have given me effective tax relief of 62% (UK).


Etihwdivadnai

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Re: Idiotic misunderstanding of payslip
« Reply #1 on: April 12, 2015, 04:54:13 AM »
Assuming that you are not already planning to contribute 100% of the coming year's earnings into a pension
(or are planning on earning less than 13K income this year)
there is nothing stopping you from increasing the coming year's pension contribution rate or making a one-off pension contribution
to put that 13K into your pension now.

You will still get tax "relief" at 20% (at least).
Pension tax relief is not like ISA allowance where if you do not use it before the exact end of the tax year, you lose the allowance.

I am not sure how you could have got "effective tax relief of 62%" though?
I thought that the maximum marginal tax rate you could have got tax relief at was 45%?
So how does 62% effective work out?

frugledoc

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Re: Idiotic misunderstanding of payslip
« Reply #2 on: April 12, 2015, 05:54:35 AM »
Are you sure you can make pension payments after the tax year ends and claim back against that years tax?  I am pretty sure that's wrong but need to phone my provider and ask.

In the UK there is marginal tax rate of 60% between 100 - 120 k as you lose your personal tax free allowance (1 pound for every 2 pounds earned).  Just type 60% tax relief into google for full explanation (the other 2% is the National insurance)

Pension paymengets get full tax relief so if you earn between this level you can put 10k into a pension at a total cost (once tax repaid) of 4k. 

I will not make the same mistake this year but as the tax year in UK ends April 5th I have missed the opportunity last year.

I did take some advantage but didn't get it perfect and could have optimised the tax situation.
« Last Edit: April 12, 2015, 05:57:50 AM by frugledoc »

Etihwdivadnai

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Re: Idiotic misunderstanding of payslip
« Reply #3 on: April 12, 2015, 07:10:51 AM »
You are correct that cannot back-date the pension contribution and thus claim back tax already paid.

But see https://www.gov.uk/tax-on-your-private-pension/annual-allowance

You can therefore use this 13K of net (i.e. after taxation) income from last year to offset your tax liability this year
subject to a maximum of 40K total annual pension contribution (which you may already be making?)

Your pension provider will automatically claim back the 20% basic rate directly from the government when you make a contibution from net income.

You can then claim back any higher-than-20% tax paid on this same net pension contribution.

The 2% National Insurance Contribution on the 13K is permanently lost I am afraid.

And I am simultaneously both happy for you, and sad for you, that you are well enough remunerated that you get caugt in the UK's 60% marginal taxation trap.
(Personally I always "maxed-out" my pension contribution rate to never quite get caught by even the 40% tax rate)


frugledoc

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Re: Idiotic misunderstanding of payslip
« Reply #4 on: April 12, 2015, 01:50:12 PM »
Thanks.   Last tax year was by far my highest earning year ever.  I don't think I will make as much again this year,  due to certain changes in  payments for additional work which make it not worth doing anymore.