Tax relief on pension payment - online self assessment calculation is wrong!

JustJat_2

I have filed a tax return online and it appears that the tax relief on pension contributions paid after tax is miscalculated.

Pension payments are deducted AFTER income tax and paid into a stakeholder pension which claims back the basic rate tax.

As a 40% taxpayer, the £3000 of net income paid into the stakeholder pension is equivalent to £5000 gross pay. However, the online self assessment form gives a tax refund of £600 - which is treating the £3000 as gross income and not net.

If you give £3000 to charity by gift aid from your net pay, the tax relief it calculates is £1000.

Surely these 2 situations are mathematically the same - £3000 of net income, basic rate tax claimed back by recipient, remainder to be claimed back on tax return.

Has the Inland Revenue made a numerical error? I do have a maths degree so I understand the difference between gross and net....

Linton

JustJat wrote: »

I have filed a tax return online and it appears that the tax relief on pension contributions paid after tax is miscalculated.

Pension payments are deducted AFTER income tax and paid into a stakeholder pension which claims back the basic rate tax.

As a 40% taxpayer, the £3000 of net income paid into the stakeholder pension is equivalent to £5000 gross pay. However, the online self assessment form gives a tax refund of £600 - which is treating the £3000 as gross income and not net.

If you give £3000 to charity by gift aid from your net pay, the tax relief it calculates is £1000.

Surely these 2 situations are mathematically the same - £3000 of net income, basic rate tax claimed back by recipient, remainder to be claimed back on tax return.

Has the Inland Revenue made a numerical error? I do have a maths degree so I understand the difference between gross and net....

Basic rate tax relief is claimed by the pension comapny and added to your pension. So you only get back the extra for higher rate.

jem16

JustJat wrote: »

As a 40% taxpayer, the £3000 of net income paid into the stakeholder pension is equivalent to £5000 gross pay.

It doesn't work like that though. If you pay in £3000 to a pension scheme from net pay, then only basic rate tax relief is counted so that £3000 net is seen as £3750 gross. 20% basic tax relief is added to your pension by the pension provider so £750. You then cliam the extra 20% from HMRC so £750 is refunded to you either as a cheque payment or by a reduction in the tax you owe. So the £3750 payment has cost you £2250.

If you actually wanted to make a £5000 gross payment you would have to pay £4000 into your pension. It would be grossed up to £5000. You would then get another £1000 back from HMRC resulting in a £3000 net payment.

However, the online self assessment form gives a tax refund of £600 - which is treating the £3000 as gross income and not net.

You should have entered £3750 on your SA form as it asks for the gross payment. This would then have given a £750 refund.

Or as I said if it was really £5000 gross into your pension scheme, you pay in £4000 and then enter £5000 on your SA which will give a refund of £1000.

JustJat_2

AH HA! Thank you - the wording on the form says "enter the payments and basic rate tax" - I just entered the net payment.

I have to say that somebody at the Inland Revenue has mad exactly the same mistake - they made the amendment for last year as it was missed - and they didn't add the basic rate tax even though they were working from payslips net of tax.

jem16

JustJat wrote: »

they made the amendment for last year as it was missed - and they didn't add the basic rate tax even though they were working from payslips net of tax.

Why would HMRC have your payslips?

JustJat_2

jem16 wrote: »

Why would HMRC have your payslips?

Actually the tax return is my husband's - I do the work, he just files it. In previous years he has done the whole return. When I took over I realised that he should have been claiming relief on the stakeholder pension. Because the error goes back several years he wrote to the Inland Revenue including all the documentation. They wrote back saying he has to make a separate claim for years before 2009/10. For 2009/10, they made the amendment - and put in £3000 resulting in a £600 repayment which is when I realised that there was something wrong with the maths.

jem16

JustJat wrote: »

Because the error goes back several years he wrote to the Inland Revenue including all the documentation.

The pension company normally send a certificate of contributions made. That would have shown the gross payment. This seems like the best documentation to send.