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Joe has earnings of £60,000 and his personal pension contributions are £7,200 (net)
no other taxable income. Calculate the tax liability when tax relief is given at sourceCalculations are
net income £60,000
less PA (£11,500)
taxable income £48,500The basic tax band is increased by £33,500 + (7200 x 100/80)
Tax
£42,500 x 20% £8,500
£6,000 x 40% £2,400Tax liability £10,900
Now someone who pays occupational scheme pension, their account would look like
income £60,000
less Pension £9000
total £51,000less PA (£11,500)
taxable income £39,500
Tax
£33,500 x 20% £6,700
£6,000 x 40% £2,400Total tax liability £9,100
How i understand that both have a tax relief of £1,800 but what i cant understand is why is the second person better of by paying tax of £9,100 as where the first person has a liability of £10900.
I’m sure the calculations are right but am i reading the tax liabilities wrong.
Thank you for your videos and help, much appreciated
Nothing wrong with your calculations but you have to remember that with the PPC he only had to pay 7,200 into the pension fund whereas with the occupational scheme he paid 9,000 hence the 1,800 difference, so:
– with PPC he pays out income tax of 10,900 plus PPC of 7,200 = 18,100, whereas
– with occupational scheme he pays out income tax of 9,100 plus pension contribution of 9,000 = 18,100 the same amount of payments out of the same gross incomeYou will not have to prove this merely to do the correct computations as you have shown.
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