Tax relief on pension contributions

I

imalwayshappy

Registered User
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Hi All,

A question in relation to tax relief on pension contributions.

Person earns 40k
standard rate of tax (20%) 7k
marginal rate (40%) 2k
Total tax paid 9k

Person wants to make an AVC of 10k. Would the tax relief still be 4k (marginal rate) even though they only paid 2k at the marginal rate last year or does it need to be split? I am just wondering is the maximum amount of tax relief on a pension contribution capped' at the amount of tax you actually paid at the marginal rate.

I hope this is clear!

Thanks
 
You’ll get the relief at the higher rate only for the amount of tax paid at that rate and then 20% on the balance.

So only €3k of tax relieved in the above example, i.e. €2k at 40% and €1k at 20% based on the €10k contribution.
 
Gordon Gekko said:
You’ll get the relief at the higher rate only for the amount of tax paid at that rate and then 20% on the balance.

So only €3k of tax relieved in the above example, i.e. €2k at 40% and €1k at 20% based on the €10k contribution.
Click to expand...

+1

Or to illustrate it a different way ... this is simplified ...

Without pension contribution:
  • First €35,300 taxed at 20% = €7,060
  • Next €4,700 taxed at 40% = €1,880
  • Total tax paid = €8,940
With pension contribution, total income is effectively reduced by the €10,000 to €30,000, so total tax is €30,000 x 20% = €6,000.

Saving on tax is therefore €2,940.

P.S. - I love your username. :)

Regards,

Liam
www.ferga.com
 
I have a follow on question to the OP which isnt 100% clear to me from research, perhaps Liam or Gordon know this off-hand.

Can a PAYE employee with dividend income from shares or interest on savings etc , include this additional "unearned income" towards the sum used to calculate their maximum AVC allowance, subject to the E115k maximum ceiling

Thanks
Fidel.
 
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