Originally posted by Lewis
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Remember that one of the original conditions of the problem was that the amount ending up in the pension had to be the same either way. In other words, a £800 net contribution (subsidised from other income) should be made in your example.
The reason I say there is an advantage is because there is nothing in the tax return that links the treatment of the extra dividend income to the treatment of the extra pension contribution. The extra dividend income increases the amount taxed at the higher rate by £878, but a £800 net (£1000 gross) pension contribution decreases it by £1000. Assuming the difference of £122 is dividends on which extra higher-rate tax of 22.5% would have been paid, you save 22.5% * £122 = £28, but you had to make up the difference between £800 pension contribution and £790 dividend with £10 other money, so overall you are only £18 better off.
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