Doing the sums on pension contributions post Mortgage

veryangryman

So Im paying roughly 1500 per month towards Mortgage for the next 3 years before its finished.

Am used to this outlay so likely will throw most or all of similar outlay towards AVCs for pension.

With the tax breaks one gets on a pension, am i roughly correct to say that if I send €750, I would get a similar benefit. As 750 gross is as good as 1500 net with our higher tax rates.

coylemj

You have the numbers upside down. If you were to contribute gross 1,500 p.m. to an AVC and are currently paying 40% on the top of your income, you will save the 600 (40% of 1,500) income tax so the net cost (the reduction in take-home pay) will be 900.

If you want to start with a net contribution and figure out how much gross to have deducted from your monthly salary, divide the net number by (1- your marginal tax rate). So if you are paying tax at 40%, divide the number by 0.6. That means that if you want to convert all of your existing mortage monthly outlay (1,500) to an AVC deduction which costs the same in take-home pay, you divide 1,500 by 0.6 which yields 2,500.

So you'd ask your employer to deduct 2,500 monthly for the AVC. This will reduce your monthly PAYE deduction by 1,000 (40% of 2,500) meaning that your take-home pay will be reduced by 1,500 p.m. Note that for tax relief, any existing pension contributions plus the AVC are capped (as a percentage of gross salary) based on age so you may not be able to make that size deduction if you are in a younger age bracket.

The tax relief is on PAYE only except in cases like director pensions.