A more detailed explanation of why pension additions are tax efficient. To do this we'll look at an example.
If you earn
£40,000 a year, and live in England, you would expect to pay:
- £5,484.20 in Income Tax.
- £3,291.60 in National Insurance.
Your take-home pay is
£31,224.20 (not including other deductions or allowances).
If you decided to contribute
£2,000 to your pension, you would expect to pay:
- £5,084.20 in Income Tax (you are paying £400 less because the £2,000 isn't taxed).
- £3,291.60 in National Insurance (pension contributions still have National Insurance contributions).
Your take-home pay is
£29,624.20 (not including other deductions or allowances). However, you have also contributed
£2,000 to your pension so with your take-home pay and pension contribution you have gained
£31,624.20, so you are
£400 better off.
