Higher rate pension relief: Are HMRC fleecing me?

tom_lloyd_2

I am having (and have been since April last year) correspondence with HMRC regarding claiming tax relief on my pension contributions.

I am a higher rate tax payer and my pension contributions do not take me below the higher rate band.

Therefore, for every £60 net contributions (i.e. paid by me out of my bank account into a personal pension (I do not use salary sacrifice), I am due £40 tax relief.

This comes in 2 ways:

1. Firstly from the pension provider

2. Secondly from HMRC.

The common misconception (that many people including banks and HMRC make - see Scottish Widows's calculator re pension reliefs - which is, incredibly, just wrong) is that the pension provider gives you £20 and HMRC give you the other £20.

Actually what happens is (and this is where the sums get a little confusing), the pension provider gives you basic rate tax relief of 20% as if you were a basic rate tax payer. They are not permitted to assume you are a higher rate tax payer. Many of you are now probably (and rightly) asking why this makes a difference. 20% is 20% right - wrong.

Basic rate tax relief if you are basic rate payer means you tax rebate = divide the contribution by 80 and multiply by 100 and then subtract the contribution - e.g. 80 / 80 *100 - 80 = £20. So for every £80 you contribute you get £20 relief. So if you do this on £60 you get a £15 relief.

HMRC however assume you get £20 relief from your pension provider (and despite me showing them evidence to the contrary will not budge) and give me £20 relief. So with the £15 from the pension provider the relief if £35 - i.e. I am missing £5 for every £60 of my own money contributed.

The way HMRC do it in their calculations is to increase the 20% tax band by the amount of your gross contribution (i.e. £100 for every £60), giving you £20 back. Instead they should increase your personal allowance (thereby giving you £40 back) and decrease the tax rebate from them by the amount received from your pension provider.

The above is a bit convuluted and difficult to explain (probably why it is taking me ages to get HMRC to sort it).

The reason for the post is to see if anyone else has had this situation with HMRC and managed to persuade them you are correct and get the right amount of relief? Also, any comments on how better to explain the above or if I'm incorrect would be appreciated!!

I am banging my head against a brick wall with HMRC - anyway I've gone through their complaints procedure and I am getting a final decision from them shortly so if that is still wrong I will be taking this to the adjudicator / parliamentary obudsman.

I wanted to put this out there also because if this is happening to everyone (and people are assuming that HMRC are giving them the right amount) then we should definitely publicise this and make HMRC pay the right amount in future. It doesn't help that most of the pension provider and bank and newspaper websites assume £20 from pension provider and £20 from HMRC.

jamesd

See the Stakeholder Higher rate tax IR "scam".

You pay in £80. You get £20 added by the pension provider so you have £100 in the pot. HMRC pays you £20 direct. You are now out of pocket by £80 - £20 refund = £60 and have £100 in the pension pot. That £60 net cost to you is correct to get the £100 pension pot with the full 40% tax relief.

For every £100 you want in the pension, pay in £100 less basic rate tax = £80 and the numbers will work out perfectly: you get £20 added and £20 refunded.

Take solace from not being the only person who misses the HMRC rebate going back to you and what it does to the numbers.

tom_lloyd_2

Thanks for the link to that post - I did do a search but didn't see that - its exactly on point (and is actually worse if they do not add your gross contribution to the basic rate band but add net + pension provider relief).

I'm yet to read the full thread but the initial post says HMRC have said the rules are the rules - well no - if their rules are contrary to law then I'll challenge them!!

But hang on re your second statement, it doesn't work unless I've misunderstood.

If I pay in £80, as a higher rate tax payer I am due a rebate of 80/60 * 40 = £53.33.

So if I get £20 from the provider and £20 from HMRC - I am still out of pocket by £13.33!!!

CLAPTON

you are incorrect

if you contribute 60 from your taxed take home pay then it works like this

you pay 60


your pension provider grosses this up for the 20% rate
i.e. he groses it up to 60/80% = 75

so 75 is paid into your pension

the HMRC allows 40% tax relief on the 75 i.e. 75 *40% = £30

but the pension provider has already claimed 15 on your behalf so the HMRC owe you the other £15


The important part is that your actual payment is grossed up by 20% and not by 40%

if you want to get 40 tax relief then you must pay net payment of 80
then that will be grossed up to 100 (i.e. 80/80%)
then the HMRC allows you 40% i.e. 40 of which 20 has already been claimed by the pension provider and you then get other the 20 back.

dunstonh

Contributions are based on the gross contribution and worked back from that.

So,
£100 being paid means your direct debit will be £80 and you claim the additional £20 for higher rate back via your tax return or notification to HMRC.

If I pay in £80, as a higher rate tax payer I am due a rebate of 80/60 * 40 = £53.33.

So your gross contribution is £80. Your direct debit is £64 and you claim additional tax relief of £16. Making your net equivalent contribution £48

hugheskevi

The system works as intended and is correct. Candidly, you are wrong and your challenge will fail.

If I pay in £80, as a higher rate tax payer I am due a rebate of 80/60 * 40 = £53.33.

No, you are not.

You are due the scheme to gross it up to £100 (basic rate relief) and to get a £20 tax rebate from HMRC (higher rate relief).

So the total contribution of £100 cost you £60, as intended, giving you full 40% tax relief.

So if I get £20 from the provider and £20 from HMRC - I am still out of pocket by £13.33!!!

How much HR tax would you pay on £100 of earnings? £40.

That is the relief due to you on a £100 gross contribution (which is what you have made if you sent an £80 cheque to the provider).

marklv

He may be a higher rate taxpayer but good at maths he aint'!

jamesd

tom_lloyd wrote: »

If I pay in £80, as a higher rate tax payer I am due a rebate of 80/60 * 40 = £53.33.

HMRC decreases how much you paid for the rebate you got from the pension provider.

Pay in £80, get £20 from provider, £100 in pot. HMRC refunds 20 to you. Now you are £60 out of pocket and have £100 in the pot.

What money is missing when you paid £60 after HMRC refund and have £100 in the pension?

tom_lloyd_2

marklv wrote: »

He may be a higher rate taxpayer but good at maths he aint'!

Actually I am but the rules are not exactly clear are they.

Thank you everyone else for their replies.

The part where I was getting confused is what my "gross" contribution is. As I thought £60 is the net (i.e. direct debit) so grossed up it should be £100. Whereas what you are saying is that £60 is grossed up to £75 (i.e. added 20% from pension provider).

What I am confused about is that if I put in £60. Pension provider grosses up to £75. Now to get to the £100 in my pot that I am due (as I'm a higher rate tax payer) - HMRC should give me an additional £20 - which I then put into the pot and get another £5 from the provider - £60 + £15 + £20 + £15 = £100. Makes sense. Basically I have to put the HMRC relief into my pension again to see the full 40% relief.

But what a few of you said above is that for a £60 contribution, pension provider will give £15 and HMRC will give £15 - are you sure?

Thanks again (to the people trying to be helpful) for all the replies.

tom_lloyd_2

Oh and one other thing - why could HMRC not explain it as clearly as you guys have - surely that is their job!!

tom_lloyd_2

dunstonh wrote: »

So your gross contribution is £80. Your direct debit is £64 and you claim additional tax relief of £16. Making your net equivalent contribution £48

Hold on surely the net contribution is the amount that leaves my bank account - how is it lower?