Stakeholder Higher rate tax IR "scam"

Higher_Rate_Tax_Payer

I am a higher rate taxpayer and have been a member of a stakeholder scheme for about the last 18 months.

Now that my tax for 08-09 has finally been calculated and reconciled, it has come to light that the Inland Revenue does not give 40% tax payers 40% tax relief on their stakeholder payments. I have challenged this with a number of people at the IR (including a technical advisor) and I have been told that this is the case and this is how the rules work.

Here are some simple numbers:

• I earn £100, and after 40% tax I take home £60.

• I put this £60 in to my stakeholder scheme. The stakeholder provider claims basic rate tax relief on this amount, so grosses it up as follows: £60 x 10/8 = £75

• I then claim the remainder through my tax code. I always assumed that "the remainder" was £25, but it would appear not.

• The IR take £75 as the gross amount and then add 20% tax relief once more, so: £75 x 10/8 = £93.75. This extra relief is paid through my tax code or final year end declaration.

The IR claim that because they provide 2 lots of 20% relief that they are providing 40% tax relief. I counter that a percentage is only as relevant as the number it refers to. They claim the rules are the rules and I feel ripped off.

So, if you are a higher rate tax payer with a stakeholder scheme, the actual tax relief you are getting is about 34%, not 40%. Fair eh?

CLAPTON

if you wish to invest 100 in your pension fund then you need to actually pay
100 x 80% i.e. £80

the pension fund will then reclaim the 20 in tax and so you have your 100 invested

you then claim from the HMRC saying you paid 80 out of taxed earning
they then gross up to 100 on which you are allowed 40% off
but you have already benefited by 20 from your pension provider and they then pay you 20

your mistake is paying only 60 to your pension provider as that way you are 'only ' putting 60/.8 = 75 into your pension

Higher_Rate_Tax_Payer

Thank you for your reply.

I am not too worried about whether I want to put £60 or £80 in to my pension, the numbers were just for ease of explanation.

My point is this, I earn £100 and the inland revenue only give me back £93.75 when I make a pension contribution. This seems unfair and against the general principles of pensions, unless I am missing something here?

hugheskevi

unless I am missing something here

You are confusing pre and post tax.

You are paid £100. You pay tax of £40 on it and receive £60.

You then put £80 into the Stakeholder. The provider adds £20, and you then claim £20 back from HMRC. So at the end of that, you paid £60 and have £100 in the pension.

You might consider it unfair that you don't get all the relief and have to give a loan to HMRC until you get money back, but you can adjust your tax code in-year so that HMRC gives you tax relief in anticipation of a contribution, thus giving you the interest free loan

ManAtHome

The key point is that the HMRC refund for higher-rate is repaid to you - it doesn't go into your pension, so:
You pay in £60 which is rolled up at standard-rate to £75 which is your total gross pension contribution. You then get a repayment of £15 for higher-rate (£75 at 20%), so your contribution of £75 has cost you £45 (£60 less your £15 repayment).

As Clapton said, your payment in has to be the gross you wish to add less standard-rate tax.

dunstonh

My point is this, I earn £100 and the inland revenue only give me back £93.75 when I make a pension contribution. This seems unfair and against the general principles of pensions, unless I am missing something here?

You are not looking at the right figures.

The above posts show the correct levels. i.e. you request to pay the gross amount (£100). The pension provider takes the net amount from you (£80) and you claim the extra amount (£20) back via your tax return.

The gross figure is always the starting point for any calculation.

Higher_Rate_Tax_Payer

ManAtHome wrote: »

The key point is that the HMRC refund for higher-rate is repaid to you - it doesn't go into your pension, so:
You pay in £60 which is rolled up at standard-rate to £75 which is your total gross pension contribution. You then get a repayment of £15 for higher-rate (£75 at 20%), so your contribution of £75 has cost you £45 (£60 less your £15 repayment)..

That is it! That is the point I was missing!

I consider myself reasonably astute with money and with tax and have been crunching the numbers on and off for months now and had convinced myself that I was being ripped off. This wasn't helped by the IR who also seemed confused by this and unable to code me correctly (3 different operators coded me three different ways based on the same information).

So thank you, one and all.

HRTP