Stand-out Q – income tax…

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THU, 04 DEC 2014

Our Technical Hub provides access to a wide range of pension tax and trust technical resources. Every now and then we post tweets covering stand out questions from our technical content and our answers in case others might also find them helpful. As Twitter’s character restrictions only allow for the bare bones of the Q&A we link to the details here, too.

Question
By making a pension contribution of £70K net, what’s the effect on the client’s income tax position if they have taxable earnings of £149K in 2014/15?

Answer
It’s assumed that the client has carried forward unused annual allowance so receives tax relief on the full pension contribution. Their income tax liability will be £53,227 if they don’t make a pension contribution of £70,000 net, as shown below. As their adjusted net income exceeds £120,000 they lose the entire personal allowance of £10,000.

Table 1 for blog

However if the client makes a pension contribution of £70,000 net their income tax liability will be reduced to £31,727, as shown below. The pension contribution reduces their adjusted net income to below £100,000 reinstating their entitlement to the full personal allowance of £10,000.

Table 2 for blog

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