Bill is self-employed and has been contributing £1,500 a month into his personal pension for the last five years.
Over the last year, Bill has been working on a large contract and expects his profits for the 2021/22 tax year to be around £120,000.
He understands that he can reduce his tax bill and increase his retirement savings by contributing to his pension. He would like to pay in a further £40,000 during the 2021/22 tax year on top of his monthly contributions.
As Bill is already making monthly contributions to a personal pension, the first step for him is to work out the total of these once tax relief has been applied.
To calculate this, he needs to take the £1,500 he's contributing and divide it by 0.8 (1-20% - the basic rate of Income Tax).
His contributions therefore work out to be £1,875 a month or £22,500 for the year.
Bill wants to pay an extra £40,000 into his pension. After applying basic rate tax relief, as above, the total (gross) contribution works out to be £50,000.
In 2021/22, Bill's annual allowance is £40,000. After deducting his monthly contributions of £22,500 he'll have £17,500 available to use this tax year.
Bill also has unused annual allowances over each of the last three years, so he elects to use carry forward and use his unused allowance of £17,500 from 2018/19 and £15,000 from 2019/20.