Tax on Pension

Dilly

I am in the fortunate position of already receiving a pension which I do not need to spend Approx £1100 per month, which has been taxed at 20% already when it is paid to me
Because I have this pension I am now a higher rate tax payer. The tax office has agreed to continue the tax taken on the pension at 20%. I asked them to do this as I am transferring all the pension into a SIPP and want to invest as much as possible as soon as possible
In exchange the tax office have reduced my tax code on my earnt salary, pending the submission of a tax return for 2010/11. This has reduced my monthly income by nearly £300. My salary is nearly at the top limit to pay 20% tax,so I should not owe any tax
However they tell me that I will not be able to reclaim the tax they are taking on my salary at 40% until the end of this tax year, when I shall have to complete another tax return. Seems that this will be an ongoing occurance.But is this correct? I do not owe them any further tax as I am investing my pension into another pension and the payments should be tax free. I do not see why I should be out of pocket so much each month when I will not be receiving any recompense
Is there anything I can do about this?
Thanks

dunstonh

You pay the contributions net of basic rate tax and the higher rate tax relief is reclaimed via your tax return at the end of the year.

I do not see why I should be out of pocket so much each month when I will not be receiving any recompense
Is there anything I can do about this?

Swings and roundabouts. They are out of pocket on the higher rate tax you should be paying on interest and dividends.

hugheskevi

Can you not just call HMRC to give them notice of your expected taxable income and anticipated pension contribution for the tax year so that they can change your coding notice in-year?

That's what I do each year (followed by self-assessment to get everything exact), or does the presence of both earnings and a pension payment complicate things?

CLAPTON

maybe if you posted the actual figures we could make some sense of this

atush

Why did you start the pension and not defer it?

Dilly

Actually Dunstonh while I can see what you are saying I have arranged my finances with my husband, so that he receives all income from investments. I only have ISA's, so I do not owe any tax
The pension is £16850 and my salary is £41,000. I did not defer the pensionas that option was not available to me. it was a final salary scheme and if I had deferred it I would not have received any additional pension, except the 'growth' from the nominal 'salary increase' which has to be factured in each year. It was better to receive the pension and 'save' it
Hugheskevi I'm not sure if having both complicates things. Anything to do with tax turns out to be complicated. But I do know that any pension contributions up to £50,000 pa are tax free and with my salary it is still chargeable at 20% tax not 40%
I aprieciate that I am fortunate in these hard times, but £300 net per month is a lot to lose off my salary, when it is not due

hugheskevi

Writing to HMRC stating your pension and salary income, the tax codes currently applied to both, and the expected pension contribution for 2011/12 and asking them to adjust your coding notice to ensure you pay the right amount of tax couldn't hurt - I don't see why they couldn't do it.

You could also try calling with all that info, but they might well ask you to write in anyway, so it could be quicker just to go straight to writing.

dunstonh

They would do it if the payment is monthly and consistent. You can update most things during the tax year. However, if its ad hoc single payments then its best to wait

hugheskevi

I only make a single, ad hoc pension payment at the end of the tax-year to my personal pension to mop up all my higher-rate income in the year.

It has always been straight-forward to get HMRC to adjust my tax-coding notice from the start of the year, with the slight irritation of having to do it in writing rather than over the 'phone. Mind you, given the lack of consistency you get from HMRC telephone centres, that probably isn't a bad thing

jamesd

Dilly wrote: »

I did not defer the pensionas that option was not available to me. it was a final salary scheme and if I had deferred it I would not have received any additional pension, except the 'growth' from the nominal 'salary increase' which has to be factured in each year. It was better to receive the pension and 'save' it

There's another benefit as well. You're accumulating a 25% tax free lump sum in the new pension. For this reason it can be a good idea to take pension income earlier than required even without your circumstances.