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Thanks for a very concise answer Sam.
I had the same understanding from various forums but wasn't convinced.
This is really like having the cake and eating it too!
In my mind, if I pay 18k in pension fund, I should really be able to reduce only that amount from my gross pay of 122k rather than reducing the grossed up pension amount?
I have filed tax returns using HMRC website, so will go online to amend and hopefully get some money back :)
Thanks for your response Its nice (on the odd occasion) that you can have you cake and eat it too !
But its basically allowing the recognition that as you suffer 40% any contributions you make should also attract 40% relief (this applies to gift aid too) But on the other hand any incomes such as dividends or interest are then subject to a further charge - so its swings and roundabouts!
The Gross Income and net income calculation (which operates the upping and reducing of the basic rate band) has always used the gross figures, as its the true recognition of the position See link here from HMRC website http://www.hmrc.gov.uk/incometax/adjusted-net-income.pdf
which specifically states Step Two - take away Gift Aid and pension contributions
Your net income is then reduced by the 'grossed up' amount - the amount you contribute plus the basic rate tax - of any:
• Gift Aid contributions
• pension contributions where your pension provider has already given you basic rate tax relief
And the online tax return also specifies to add in the pension contribution AND the basic rate tax, so you can amend these