40% tax and Pensions

crux

If our 2011 sales forecast at work is correct then it looks like I will be crossing the 40% tax threshold again sometime between December 2011 and Feb 2011.

Now I was a 40% tax payer 3 years ago, but at the time I was unaware of the impact on pensions etc so I don't know how things work regarding the tax man's contribution to your pension.

Do I start to get 40% pension contribution from the tax man on the month that I cross the 40% tax threshold or can I claim the contributions for the whole of the 2010-2011 tax year?

How do you go about getting the increased contributions? Does it occur automatically or will I need to inform my pension provider or the tax office?

lisyloo

Your tax is worked out on an annual basis, but you can only claim back any high rate tax relief that you have actually paid.
So let's say you only go £50 into the 40% tax band (for the sake of example). You would only be able to claim back 40% tax on that small part of your pension. You wouldn't be able to get hundreds or thousands of pounds back in tax relief if you haven't paid it.

How do you go about getting the increased contributions? Does it occur automatically or will I need to inform my pension provider or the tax office?

Depends on whether your pension is taken before tax or after tax.
If it's taken before tax you need do nothing (as the 40% tax is never taken in the first place, so effectively you've already got it back).

If your pension is taken AFTER tax, then the scheme will claim basic rate tax for everyone.
You will need to phone you tax office and tell them.
They may requite you to write a letter or they may ask you to do self assesment.
I'll find a copy of the letter I write every year.
They don't actually let me do self-assesment as my affairs are simple and there is a cost attached.
Note that you should "gross up" you pension contribution e.g. divide by 0.8, to show the amount after basic rate tax relief (this is what would be put on a self-assesement form).

lisyloo

street
town
postcode 11th May 2010


NI number: xxxxxxxxxx
Tax ref: nnn/xxxxx


Dear Sir/Madam,

I would like to submit details so that my income tax for 2009-2010 can be recalculated.
Please recalculate my income tax with the following details:

Gross savings income: £1.22
Tax paid on savings: £0.22
Personal pension contributions : £4787.87 (gross of basic rate tax relief)
One-off Gift Aid charity donations: £XXXXXX (gross of basic rate tax relief)



Yours Sincerely,



Mrs Money save

lvader

I've never had to write any letters, just call the tax office with your pension payment details and they adjust your personal allowance.

lisyloo

That might work, however be aware that you should pay 40% tax on any savings interest (that are not in ISAs).
You can also claim higher rate tax allowance on charity contributions you've made that "gift aid" qualified for.

Ivader MAY be doing the correct thing for their circumstance (if they get no savings interest).

However be aware that it's YOUR responsibility to pay your higher rate tax on savings or anything else you should be paying it on.
Ignorance is not a sufficient defence, it's your responsibility to do so.

As well as underpayments, there are also other reliefs that might be claimable.
In my case this is gift aid.

crux

lisyloo wrote: »

Your tax is worked out on an annual basis, but you can only claim back any high rate tax relief that you have actually paid.
So let's say you only go £50 into the 40% tax band (for the sake of example). You would only be able to claim back 40% tax on that small part of your pension. You wouldn't be able to get hundreds or thousands of pounds back in tax relief if you haven't paid it.

Pension contributions are taken after tax in our company.

So assuming that I go well over the threshold and pay several thousand in 40% tax. I can in that case potentially have all my 2011-12 pension contributions increased from 20% to 40%.

I will have to monitor it closer to the time, no point in going just over and having my wife lose Child benefit.

Hmm, can you use salary sacrifice to stay under the 40% threshold?

Tax = another thing I really need to learn more about!

lisyloo

So assuming that I go well over the threshold and pay several thousand in 40% tax. I can in that case potentially have all my 2011-12 pension contributions increased from 20% to 40%.

yes, especially as the threshold at which you pay higher rate tax is going down (from 37,400 to 35,000).

Hmm, can you use salary sacrifice to stay under the 40% threshold?

Yes.
It could be the same as claiming 40% tax relief except better in two aspects.
1) No national insurance on the sacrifice
2) You get it right away rather than waiting until after the tax year for any overpayment.

crux

Now here's a cheeky question!

When I used to be a 40% tax payer.

I earned a wage and payed 20% tax through PAYE and my pension contribution was taken from this income. So I got my pension contributions increased by the 20% tax man's contribution.

Then I had additional self employed income that I declared through an annual self assessment. That additional income took me into the 40% bracket and I payed several thousand in tax at 40% each year.

However in my ignorance I never claimed back additional pension contribution from the tax man!

Do you think it is possible to retrospectively get my old pension contributions made upto the 40% level for the tax years I paid 40% tax?

jem16

crux wrote: »

Do you think it is possible to retrospectively get my old pension contributions made upto the 40% level for the tax years I paid 40% tax?

Pension contributions are never made up to 40%. Your initial contribution will be increased by the 20% tax relief - the other 20% is claimed through your tax return as a refund or by an increase in your tax code meaning you pay less tax.

You may be able to claim that refund for up to 6 years ago.

CLAPTON

crux wrote: »

Now here's a cheeky question!

When I used to be a 40% tax payer.

I earned a wage and payed 20% tax through PAYE and my pension contribution was taken from this income. So I got my pension contributions increased by the 20% tax man's contribution.

Then I had additional self employed income that I declared through an annual self assessment. That additional income took me into the 40% bracket and I payed several thousand in tax at 40% each year.

However in my ignorance I never claimed back additional pension contribution from the tax man!

Do you think it is possible to retrospectively get my old pension contributions made upto the 40% level for the tax years I paid 40% tax?

surely when you filled in your self assessment form you included details of your pension payments?

crux

CLAPTON wrote: »

surely when you filled in your self assessment form you included details of your pension payments?

I honestly can't remember, if the SA asks about it then I will have filled it in.

From memory they ask about income and benefits from employment, and income from self employment. I can't remember anything about pension contributions.

Anyway I'll check it out, I know I have copies of the tax returns saved in old backup files.