Free £12,500 from the government
Ok let me show you how, firstly you must have;
– £10,000 relevant earnings
– A pension
– £10,000 spare, dont worry you get it back…
If you put £10,000 in to your pension then you will need a net amount of £8,000 to do this, £8,000 in means £10,000 in the pot. Then the government will allow you 25% of this back tax free so £2,500, the rest £7,500 you can take out at 20% so the tax cost is £1,500, or net figure of £6,000. Therefore you put in £8,000 and get back £2,500 and £6,000 total £8,500, you are £500 up.
Put in £20,000 and you get £1000, the figures double.
Another way if you are a higher rate taxpayer when you pay the money in;
– You must be a higher rate taxpayer
– You can only do a max of £50,000 in any one year
– You must be a basic rate taxpayer when you withdraw money.
You put in £50,000 in to your pension. This costs you £40,000 net, you then reclaim £10,000 from tax man yr after. So really its cost £30,000 net.
Your £50,000 will then give you 25% tax free £12,500. The rest of the money £37,500 can be take out as income in a lump sum but if you take it out over 2 yrs and dont go in to the higher rate tax bracket then you will be charged 20% on this money.
20% of £37,500 is £7,500
Net income is £30,000.
Plus tax free cash of £12,500
Total back is £42,500 for a £30,000 input amount.
Drawback is it is over a few years. The point with this example is that now there are no restrictions on taking your money out of your pension you should maximise your contributions up until your stop working.