Tax Code and pension relief

asc99c

I've just received a new PAYE coding notice lowering my tax code, and notifying me I will probably need to pay an additional sum at the end of the year.

I understand the reason and was half expecting it - I've added the family to my private medical cover, which has increased the taxable benefit, and they've just taken 9 months to adjust my tax code.

However, examining the coding notice I don't understand the amount for my personal pension relief. This adds £566 to my allowance, which I can't understand.

I'm a 40% taxpayer, and pay £1850/yr into a personal pension. Personal pensions are always paid net of basic rate 20% income tax. E.g. I actually pay in £1480 (80% of the amount), and the pension company reclaims the additional £370 from the government. As far as I can tell, I then need to reclaim an additional £370 of tax myself. My calculations suggest this would require £925 adjustment. (40% tax on £925 is £370).

Clearly, £925 and £566 are very different numbers. Does anyone know how this stuff works? I'm presuming I've gone wrong somewhere in my understanding of it!

asc99c

D'oh, I was worried when I couldn't find a decent calculation searching on Google that this is a more difficult question than it sounds! I'll speak to the Tax Office on Monday and put the answer on here - with all the tax notices going round at the moment hopefully it will help someone else

asc99c

OK, spoke to the tax office this morning. They've updated my tax code, and it looks like £925 was the correct figure! I'm quite pleased by that, since it should mean my calculation is correct and hopefully that scales back over the last 5 years as well. What is interesting is that over the last 5 years, I've had to ring them most years to update them with my new salary and pension contributions. They've then calculated a new tax code for me and every single time it has apparently been wrong. For anyone interested in checking their own tax code, the correct figure should be:
(20% * Gross Pension Contribution) / 40%

Which simplifies to half your pension contributions e.g. £1850 into a pension = £925 pension tax relief (this assumes that your pension contributions don't take you back out of the 40% tax band).