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Tax (relief?) on pension contributions

Do I understand the following correctly?

If I get paid a salary of say £7,000 and being under the personal tax threshold pay no tax (or NI as it happens) then I pay it all into a private pension fund, the pension provider will still claim back the 'tax' that I have paid from HMRC and credit this theoretical 'tax' to my account which will mean that I have £8,750 in my pension pot.
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Comments

  • dunstonh
    dunstonh Posts: 120,184 Forumite
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    No.

    The maximum you can pay to the pension is £7000. So, you would write the cheque out for £5600. The pension provider would then either prefund the tax relief over night or request it and you get it added about 6-8 weeks later. That brings it up to £7000.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • System
    System Posts: 178,374 Community Admin
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    Taken from http://www.hmrc.gov.uk/incometax/relief-pension.htm
    What happens if you don't pay tax?

    If you don't pay tax you can still pay into a personal pension scheme and benefit from basic rate tax relief (20 per cent) on the first £2,880 a year you put in. In practice this means that if you pay £2,880 the government will top up your contribution to make it £3,600. There is no tax relief for contributions above this amount.
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  • Freecall
    Freecall Posts: 1,337 Forumite
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    Thanks.

    The response from dunstonh seems sensible and probably answers my question but I don’t understand the quote from !!!!!!.

    For years I have not paid tax (on income) but have paid more than £3,600 (£2,880) into my pension plan. My pension provider has added the ‘tax’ to my contributions and it has all been entered onto my tax return.

    The limit of £5,600 (in my example) therefore would seem to make sense.
  • System
    System Posts: 178,374 Community Admin
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    I don't understand it either but that's what HMRC say
    This is a system account and does not represent a real person. To contact the Forum Team email forumteam@moneysavingexpert.com
  • Freecall
    Freecall Posts: 1,337 Forumite
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    At least (from the link) I now know that I am not the fist to query this.

    A bit of searching on the net however fails to generate agreement amongst those in the know.

    I would have thought that this was pretty simple stuff. There must be lots of people in this position.
  • thenudeone
    thenudeone Posts: 4,462 Forumite
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    !!!!!! wrote: »
    "There is no tax relief for contributions above this amount."

    The accountingweb site contradicts the hmrc site.

    In the example given, someone earning £6k can send a £4800 cheque and it will be grossed up to £6k by applying tax relief to the full contribution, but the hmrc site suggests that tax relief is limited to contributions of £3600 gross.

    Which one is right? and how is this policed?
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  • dunstonh
    dunstonh Posts: 120,184 Forumite
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    edited 3 March 2012 at 12:27AM
    http://www.hmrc.gov.uk/incometax/relief-pension.htm

    If you look further down on the HMRC site you will see they contradict themselves:

    You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension from which you benefit from tax relief is subject to an 'annual allowance'. The annual allowance amounts for the current and previous two tax years are shown below.

    that was under limits on tax relief.


    Here is another HMRC link:
    http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM05200020.htm
    I would have thought that this was pretty simple stuff. There must be lots of people in this position.

    Its funny you say that but I dont think so and that is possibly why there is uncertainty. Also, the £3600 limit is now 11 years old. The personal allowance in 2001 when the £3600 limit was introduced was £4385. So, back then the number falling between £3600 and £4385 would have been small. The number wanting to exceed £3600 in pension contributions were probably near zero. Over the years the personal allowance has gone up but the £3600 has stayed still. Hence why you now see a potential anomaly.

    My understanding has been and remains (but now shaky)that you get tax relief on your contributions upto 100% of your earned income (subject to annual allowance) and if you earn less than £3600 then you get tax relief upto £3600 on the contribution. I would say RPSM05200020 is the key reference for this. However, it is clear that there is uncertainty. If i had someone in that position, I would be making an enquiry with HMRC and taking a name.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
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    Freecall wrote: »
    Thanks.

    The response from dunstonh seems sensible and probably answers my question but I don’t understand the quote from !!!!!!.

    As you pay no tax. Then you shouldn't be receiving tax relief on the contributions above the £2,880 threshold.


    Suggest you speak to the HMRC for clarification.
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