Tax on AVCs?

MacBen

Hi There,

There’s probably a simple answer to this but I can’t find anything online which explains my query in plain English that I can understand!

I took early retirement from my previous job about seven years ago and about the same time started another job with another final salary pension scheme. This week I decided to start to pay an AVC from my monthly salary to the PRU (with whom my current pension provider has an association). I was expecting that my tax relief would be based on my total income (my other pension + current salary) some of which would be 40% but the person from the PRU said that it would be based solely on my current salary at the lower 20%. I had the feeling that all of the information was coming off of crib sheets and was wondering whether this was correct? It probably is but if there are any experts out there I would appreciate a view. Many Thanks

thenudeone

The pension provider will only ever claim 20% tax relief.
If you are a higher rate taxpayer you have to claim the difference by writing to HMRC or completing a tax return.

eg:
You earn £1000 which you want to pay into your pension
You pay a cheque for £800 to your pension.
The pension provider claims £200 / 20% tax relief making £1000 in your pension.
You get a refund of £200 from HMRC so the net cost is only £600.

Alternatively in the tax assessment, HMRC may increase the size of the band which is taxed at 20% (which matched the relief claimed by the pension), but the effect is exactly the same.

MacBen

thenudeone wrote: »

The pension provider will only ever claim 20% tax relief.
If you are a higher rate taxpayer you have to claim the difference by writing to HMRC or completing a tax return.

eg:
You earn £1000 which you want to pay into your pension
You pay a cheque for £800 to your pension.
The pension provider claims £200 / 20% tax relief making £1000 in your pension.
You get a refund of £200 from HMRC so the net cost is only £600.

Alternatively in the tax assessment, HMRC may increase the size of the band which is taxed at 20% (which matched the relief claimed by the pension), but the effect is exactly the same.

Appreciate your comments; just to be clear….The pension I’m currently paying into isn’t administered by the PRU, only the AVCs. I don’t know if the tax rules governing Pensions & AVCs differ or whether they are one in the same. We had a presentation by a Rep from the Pru a couple of weeks ago and my understanding is that tax relief on AVCs would be at the highest rate of tax and some of their literature states “adding £200 per month to your pot will only cost you £160 if you're a basic rate taxpayer and even less if you're a higher rate taxpayer”. My query is that I do pay some of my total income at 40% but this is on two incomes (salary and the other pension) added together, but according to the Pru only my current salary is taken into account for tax relief purposes, but I assume from what you are saying is that I might be able to claim for a higher amount but I would need to sort this out with HMRC independently and possibly fill in a tax return?

thenudeone

The Pru (or any other provider) doesn't know or care what your top rate of tax is. They only ever reclaim basic rate tax.

So yes - it's up to you to contact HMRC and ensure that any 40% tax relief is received. Your tax return always includes income from all employments so it's your total income that's important.

The only exception is if your payroll operates by deducting the pension contributions BEFORE tax is calculated. This is uncommon nowadays and only used for some occupational schemes. In this case no-one ever claims any tax relief because it's all done by the payroll. You can tell if this is the case by comparing the value added to your AVC fund with the value deducted from your pay. If these values are the same, and there is never any additional entry for tax relief, your pension operates in this way.

MacBen

thenudeone wrote: »

The Pru (or any other provider) doesn't know or care what your top rate of tax is. They only ever reclaim basic rate tax.

So yes - it's up to you to contact HMRC and ensure that any 40% tax relief is received. Your tax return always includes income from all employments so it's your total income that's important.

The only exception is if your payroll operates by deducting the pension contributions BEFORE tax is calculated. This is uncommon nowadays and only used for some occupational schemes. In this case no-one ever claims any tax relief because it's all done by the payroll. You can tell if this is the case by comparing the value added to your AVC fund with the value deducted from your pay. If these values are the same, and there is never any additional entry for tax relief, your pension operates in this way.

Many thanks for your useful explanation!