The tax consequences of Pension contributions.
Pension contributions have tax consequences when contributed by taxpayers.
Revenue gives tax relief for contributions made into a pension fund.
Conditions for the relief
- The maximum tax relief that can be enjoyed will be based on a minimum of £3600 and the relevant earning in the tax year.
- Relevant earning of a taxpayer is the employment income, trading income, income from furnished letting, benefit in kind, etc.
How tax relief is claimed from pension contributions?
Net pay arrangement is used to receive tax relief for the taxpayer that contributes to using occupational pension.
The way net pay works; payroll will be applied to the taxpayer’s salary after pension contribution has been deducted.
How tax relief is calculated?
If an individual earns £1000 (ignore personal allowance), you pay tax at 20%. Tax due will be £200
However, when an individual does make £100 contribution into a pension scheme under the net pay arrangement.
The taxpayer net pay after pension deduction will be £900. The tax due will be £180, thereby saving £20. Our Northampton accountants can prepare your annual accounts and calculate your income tax liability or refund. We will process your tax returns on your behalf.
Under a personal pension scheme.
The taxpayer that contributes to personal pension scheme also receives tax relief.
The taxpayer can claim their tax relief through self-assessment rather than fro their income.
Second tax relief from contribution into a pension scheme.
When an individual reaches the age of 55, they can draw money out of their pension fund.
The first 25% of the pension fund will be drawn tax free and the remaining 75% will be taxed under income tax.
Changes that were made to the pension contributions.
Taxpayers were given several options when withdrawing money out of their pension funds.
1. The taxpayer can withdraw the pension pot You can normally withdraw up to a quarter (25%) of your pot as a one-off tax-free lump sum.
The remaining 75% can then be converted into taxable income for life called annuity.
2. They can withdraw the whole pension as cash: With this option, the taxpayer will withdraw 25% tax-free, however, the remaining money received will be taxed under income tax.
So, therefore, the taxpayer will most likely be paying more tax that tax year.
3 The taxpayer can choose to take 25% of the pension of your pension pot tax-free. The remaining will then be used to reinvest into other funds.
This will then provide regular income for future use.
4. A taxpayer can also take a small cash lump sum every tax year.
The taxpayer will then have 25% of the withdraw tax-free.
The remaining 75% will be taxed under income tax, however, this will help to spread the tax effect of the withdrawer.
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