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Hi Sir,
I came across this question on personal pension contribution relief.
Taxable income: £87500
Previous years’ gross personal pension contribution: £6000/year
consider to make the maximum possible amount of additional gross personal pension contribution for the tax year, but only to the extent that the contribution will attract tax relief at the higher rate of income tax.
The question: advise the amount of additional gross personal pension contribution one can make for the tax year which will benefit from tax relief at the higher rate of income tax, and explain why this is a tax efficient approach to pension saving.
The provided solution:
For 2019/20, £(87500-(37500+6000))=£44,000 of one’s income is currently taxable at the higher rate of income tax.
This is less than the available annual allowaces of £(40,000*4-6,000*4)=£136,000 for 2019/20.
Resstricting the amount of personal pension contributions to the amount qualifying for tax relief at the higher rate will minimise the cost of pension saving because each £100 saved will effectively only cost £60 (£100 less 40% tax relief).
What does it mean by each £100 saved will effectively only cost £60 (£100 less 40% tax relief)? I don’t understand the rationale behind the calculation.
As long as you understand here the number calculations to derive the correct numerical answer then you are ok.
The statement you query however you should still understand if you have worked through the lectures for chapter 10 and the study notes at the top of page 64 which explains how tax relief is achieved for the basic rate taxpayer and then moves on to explain how the higher rate tax relief and additional rate tax relief will be given in respect of personal pension contributions.
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