Personal Tax Help - Gift Aid/Personal Pension Contributions

Having a bit of a mind block with this, I've been studying personal tax via distance learning and have my exam a week tomorrow and would love some help.

If someone has made a gift aid or personal pension contribution in the tax year, how do I know if I adjust their personal allowance by the contribution made or extend their basic rate band? I'm quite happy calculating it each way but always seem to get it confused by doing the wrong way, i.e. adjusting the personal allowance rather than extending the basic rate band or vice versa.

TIA =)


    SACKERS Registered, Tutor Posts: 11 New contributor ?
    Basic rate tax relief (20%) for personal pension contributions (PPC) and gift aid (GA) payments is given at source. The pension contribution paid is net of 20% tax.

    To get higher rate relief (40%) the basic rate band is extended by the grossed up contribution. (ie net contribution x 100/80). This means income equal to the grossed up pension contribution is taxed at 20% rather than 40%. This gives the extra 20% tax relief.

    Example John Earns £60,000 his tax would be:
    £60,000 less personal allowance of £10,000 =50,000
    31,865 x 20% =£6,373
    (50000-31865)=18,135 x 40% = £7,254
    Total Tax Liability =6373+7254 =£13,627

    Lets assume John now pays a personal pension contribution of £800. The gross contribution is £800 x 100/80 =£1,000. His basic rate band is £31865+£1,000 = £32,865

    His tax would be:
    £60,000 less personal allowance of £10,000 =50,000 (same as above)
    this time though 32,865 is taxed at 20% = £6,573
    (50,000-32865)=£17,135 at 40% =£6,854
    Total Tax Liability = 6573+6854 = £13,427

    Now lets see how John got his tax relief on his £1,000 (£800 x 100/80)gross pension contribution.
    He paid £800 not £1,000 a saving of £200.
    His tax bill was £13,427 instead of £13,627 a saving of £200
    Total savings £200+£200 = £400
    Double check John is 40% taxpayer he should have had tax relief at 40%
    40% of £1,000 = £400.

    The second part of your question refers to the personal allowance.
    This can affect the basic personal allowance when adjusted net income exceeds £100,000.

    or In the case of AGE ALLOWANCE when adjusted net income exceeds £27,000.

    Adjusted net income is equal to net income - gross PPC - gross GA

    Hope this helps
Privacy Policy