40% tax and pensions query

runscreaming

Hello all,

Have just started a job that for the first time in my life puts me into the 40% tax bracket. For the first time in my life also I don't have access to a company pension, so I'm currently paying 10% of my monthly salary, £500, into a SIPP every month. From what I've read I can get 40% tax relief on this contribution. The SIPP people are automatically adding the 20% tax relief on my monthly contribution, so in reality £625 is going in per month. I understand that I have to claim the other 20% by filling in a self-assessment form at the end of the tax year, and the implication from what I have read is that I would be sent this by default as I'm now a higher rate tax payer.

But when I went to the HM Customs website it said I only had to fill in a self-assessment if I earned over £100k. So I'm a little confused. Do I have to register myself for self-assessment? Is the tax-relief on pension contributions a separate "self-assessment" form?

Yours a little confused
RunScreaming

jem16

runscreaming wrote: »

I understand that I have to claim the other 20% by filling in a self-assessment form at the end of the tax year, and the implication from what I have read is that I would be sent this by default as I'm now a higher rate tax payer.

Higher rate taxpayers would not have to fill in a self-assessment tax return by default if their income is quite straightforward and handled by PAYE.

Easiest way to claim the other 20% is to phone up HMRC and tell them that you are making pension payments and how much (gross). They will then adjust your tax code by that gross amount.

runscreaming

Thanks for this jem16,

Please bear with me: when you say "gross" is that £700 (i.e. my £500 plus 40% relief) or the original £500? And if they adjust my tax code, presumably that means I pay less tax over the year on the understanding that rather than putting £500 in per month, I actually put in £625? But if I put in £625 won't the SIPP people apply the automatic 20% relief to £625 now instead of £500?

The bottom line of my understanding is that I want £700 a month to go into my pension pot, but it's how that last £125 arrives that is confusing!

lisyloo

from what I have read is that I would be sent this by default as I'm now a higher rate tax payer.

Not if your affairs are simple.

when you say "gross" is that £700 (i.e. my £500 plus 40% relief) or the original £500?

I believe it's gross of basic rate tax relief i.e. £625 (that's what they ask for on the tax return form).

I am not allowed to do a tax return as my affairs are relative simple, however each year I send a letter to HMRC and if you have overpaid you'll get a cheque back. It's important for you to realise that this bit goes back into your pocket and not into your pension (obvious but important for your pension planning).
Note you will also need to pay 40% tax on any savings where income tax is due (not ISAs) and you can claim back extra tax relief on gift aid charity contributions.

11th May 2010

NI number: NP xxxxxxxx

Tax ref: xxx/Txxxxx


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: £x.xx
Tax paid on savings: £x.xx
Personal pension contributions : £xxxx.xx (gross of basic rate tax relief)
One-off Gift Aid charity donations: £xxx.xx (gross of basic rate tax relief)






Yours Sincerely

MPH80

runscreaming wrote: »

The bottom line of my understanding is that I want £700 a month to go into my pension pot, but it's how that last £125 arrives that is confusing!

Ah - now - even if you contact HMRC about getting the remaining %age from your contributions - it won't go into your pension pot directly.

What will happen is that HMRC will either a) adjust your tax code so you pay less tax over the next year if you send a letter, or request it via self assessment or b) send you a direct bank transfer.

So either way - it doesn't simply go to your pension pot.

M.

lisyloo

What will happen is that HMRC will either a) adjust your tax code so you pay less tax over the next year if you send a letter, or request it via self assessment or b) send you a direct bank transfer.

My personal experience is that underpayments are added on to the tax code of the tax year after the next one (yes, not the immediately following one) and overpayments come back immediately (well a few weeks) either by cheque or bank transfer (they may have updated to more modern methods since I had one).

As already stated if you want it to go into your pension then you either need to make a lump sum contribution or amend your monthly payment accordingly.
This might seem like we are overstressing this, but money in your pocket tends to dissapear when you live towards your means whereas money in your pension is put to one side.
I can't overempahise this point enough.
I know people who "put off" taking out a pension, 20 years later they still haven't done it.
The person that put money aside has a six figure sum in their pension, the person that didn't has .......well nothing.
It's hard to explain where it went, but it I guess you just spend more if you have it.
Putting money aside into pensions and/or mortgages if a very good discipline.
Sorry if it sounds like I'm banging on but I genuinely do believe it abit of discipline can affect your lifetimes wealth by six figure sums (and that's really what this site is all about).

So you do need to bear in mind that basic rate tax relief goes into your pension and higher rate comes back to your pocket (whether through PAYE or a refund).
In future years it will be accounted for in an adjusted tax code, so you won't even over pay it, it will effective mean you pay less tax each month and hence even more of a danger it will jsut dissapear.

jem16

runscreaming wrote: »

Thanks for this jem16,

Please bear with me: when you say "gross" is that £700 (i.e. my £500 plus 40% relief) or the original £500?

You are working your tax relief the wrong way round. Tax relief is always worked out from the gross payment and not the net payment.

But if I put in £625 won't the SIPP people apply the automatic 20% relief to £625 now instead of £500?

If you paid in £625 net that would be £781.25 that the SIPP would get as gross.

The bottom line of my understanding is that I want £700 a month to go into my pension pot, but it's how that last £125 arrives that is confusing!

Think of the actual gross payment. If you want £700 to actually be in your pension pot then you make a payment of £560. ( £700 x 80%) The pension provider will immediately claim the £140 tax relief from HMRC and your £560 payment will become £700.

You will then reclaim the other 20% via a tax code change ( from the following tax year) or self assessment. This will mean that your £700 pension contribution has cost you £420.

Please do remember though that you will only gain 40% tax relief on the amount you actually pay 40% tax on. So with an £8400pa contribution you have to be above the 40% tax band by that amount - e.g. £7475 + £35000 + £8400.

runscreaming

jem16 wrote: »

Think of the actual gross payment. If you want £700 to actually be in your pension pot then you make a payment of £560. ( £700 x 80%) The pension provider will immediately claim the £140 tax relief from HMRC and your £560 payment will become £700.

You will then reclaim the other 20% via a tax code change ( from the following tax year) or self assessment. This will mean that your £700 pension contribution has cost you £420.

Huzzah! By George I think I've got it! :T

So...after a tiny recalculation of what my eventual pot needs to be, am going for:

Total paid into pot per month: £750
Which breaks down as:
Me pay in to pot: £600 per month
SIPP providers automatically claim back 20%: £150 per month

I get used to having £600 a month disappear from my salary before I see it (well nearly).

At some point after April 6th 2012 I write to HMRC saying I've paid £9000* into my pension (gross of basic rate tax relief) in the tax year 2011-2012, and they either send a cheque back for me to do with as I see fit (hmmm...to invest or blow on a new toy...hmmm...decisions) or adjust my tax the following year so I pay less (which psychologically feels like a worse deal even though it's exactly the same amount of cash!).

*ok will be slightly less as I only paid £500 (£625 gross) in April and May this year

So, simplistically speaking, the first lot of tax relief on the payments is an up-front "gift", the second lot of tax relief is more "delayed gratification"

I earn £60k so that is above £7475 + £35000 + £9000 = £51475, so I should get the full 40% relief on the £9000

lisyloo - thanks for the letter template! Have saved it onto my computer :T

Many thanks to all!
RunScreaming

jem16

runscreaming wrote: »

Huzzah! By George I think I've got it! :T

So...after a tiny recalculation of what my eventual pot needs to be, am going for:

Total paid into pot per month: £750
Which breaks down as:
Me pay in to pot: £600 per month
SIPP providers automatically claim back 20%: £150 per month

Yep you've got it now.

or adjust my tax the following year so I pay less (which psychologically feels like a worse deal even though it's exactly the same amount of cash!).

Depends on the way you look at it. This year you will pay the full £600 but next year with the tax code adjusted and you therefore paying less tax, your net pay will only have reduced by £450 and not £600 after paying the pension contribution.