Tax relief is a term used in the United Kingdom most commonly related to your personal pension, although it can apply to your business mileage or company expenses. Calculating tax relief on your pension is an important part of pension planning. The UK government gives tax relief on pension contributions as a way of encouraging you to save for your retirement. You can contribute as much as you want into your pension but limits apply as to how much tax relief you get. For the UK tax year Apr. 6, 2010 to Apr. 5, 2011 you can get tax relief on contributions up to £255,000. If you contribute more than the allowance you will pay tax on the amount exceeded.
The amount of tax relief you get on your pension contribution is based on your income and your personal tax bracket (standard rate 20 per cent, higher rate 40 per cent and additional rate 50 per cent). This information, together with your actual pension contribution,+
is used to calculate tax relief on your pension.
Calculate your gross income. You need this so you can calculate tax relief on your pension contributions. Get your income details from your weekly or monthly payslip and multiply your weekly or monthly gross income by 52 or 12.
Check how much you are contributing each week or month to your pension. The information is on your payslip. Write the information down. You now have your gross income and your gross contributions to help calculate tax relief on your pension.
List your gross income in tax groups. As of 2010, your gross income up to £37,400 is taxed at 20 per cent. Income between £37,401 and £150,000 is taxed at 40 per cent and any income over £150,001 is taxed at 50 per cent. Depending on your income you may have up to three amounts written down.
Divide the first group's £37,400 by your weekly or monthly income. The result will tell you the number of weeks or months it will take to earn £37,400. For example, if your gross monthly income is £5,000 you will reach £37,400 in 7.5 months. Repeat the process if you earn £37,401 to £150,000 for the remaining months in the year. Do this again if you earn more than £150,000.
Multiply your pension contribution by the number of weeks or months you previously calculated to get to £37,400. In the example from the previous step it was 7.5 months. If your pension contribution is £80 per month, then your figure is £600. You pay tax at 20 per cent on your first £37,400 of income, so the UK government will contribute 20 per cent toward your pension contribution. You will get £20 (£80 / 80 x 100) tax relief per month (£150 over the 7.5 months) from the government making your total pension contribution £750. For the remaining 4.5 months (to make 12 in total) your monthly contribution of £80 will be eligible for tax relief of 40 per cent so your £80 will increase to £133 (£80 / 60 x 100). Your total tax relief for the year is £389 (rounded up).