If you wish to make a contribution of £200, net of basic rate, tax each month into your plan, you would see a contribution being invested of £250 a month gross. This is because 20% of the £250 (£50) is tax relief, which the provider will claim back from the government (HMRC).
If you are a higher rate tax payer, you can reclaim the difference between the basic and higher rate tax bands through your tax return. This will be at your highest marginal rate, so for example, if you are a 40% taxpayer, you’ll be able to reclaim an additional 20%. You will receive this tax relief on the personal contributions you make into all of your personal pension plans, up to the greater of your UK earnings (subject to the Annual Allowance) or £3,600 gross each year. This means that if you earn, say £20,000 a year before tax, you could pay in to your personal pension up to £20,000 a year; but if you earn less than £3,600, you can still pay in up to £3,600 and get tax relief on those contributions. As in the previous example, you would only actually pay £2,880 and the provider would claim back £720 for you.
LR Connections provides expert independent financial advice, accountancy and estate planning services
