Contracted out of SERPS - claim back higher rate tax?

freda

I am in the process of pulling together OH and my pension details to try and make some sort of coherent strategy for the next 20 years.

OH has been contracted out of SERPS for a few years, with payments being made into a private pension instead.

This is showing additional payments due to tax relief, as would be expected.

However, for at least some of the time he has been contracted out, he has been a higher rate tax payer.

Should he have been completing a form to claim back tax at the higher rate for these years and, if so, can he do it retrospectively?

With thanks.

DavidLaGuardia

There is nothing to claim against higher rate tax. The contracted out element was a fixed amount based on his NI contributions. As with contributions from an Employer, it would not give him direct tax relief.

jamesd

No tax relief is ever due for that. Also, he's no longer contracted out because that was abolished for personal pensions from April 2012.

Work schemes can still be contracted out, meaning their employees won't be accumulating Additional State Pension rights, though this would only potentially affect final salary and other defined benefit schemes.

zagfles

jamesd wrote: »

No tax relief is ever due for that. Also, he's no longer contracted out because that was abolished for personal pensions from April 2012.

Basic rate tax relief was paid on the employee part of the minimum contribution, but don't think higher rate relief could be claimed. Not really logical as to why not. See http://www.hmrc.gov.uk/forms/ca17.pdf

jamesd

Thanks. Bit odd that it should have been given since it wasn't a personal contribution.

zagfles

jamesd wrote: »

Thanks. Bit odd that it should have been given since it wasn't a personal contribution.

It's because in the case of a contracted out occupational scheme, the employee would get an NI rebate of 1.6% in their take home pay, which would be "tax free" (it's a reduction in NI, so doesn't increase taxable income).

So if the 1.6% rebate is paid into a personal pension instead, as it was with a contracted out personal scheme, it makes sense to give tax relief on it, so they are treated the same as if they got the rebate in their take home pay as above, and invested it in a pension.

What doesn't make sense is that higher rate taxpayers didn't get the higher rate relief, whereas they would if they got the occupational contracted out NI rebate and invested that in a pension.

DavidLaGuardia

You are confusing twp different things here.

The reduction in NI for being in a contracted out occupationalal scheme was not consistent with the amount of rebate that was paid into a persional pension when an inidivudal contracted out.

The first was a reduction in recogntion that the employer was, at least, covering the amount that would otherwise have applied to SERPS and the state second pension. It didn't affect the tax liability and purely applied to NI.

The individual contracting out of a personal pension got an amount diverted from their NI that varies with age. Again it had not bearing on the tax they paid.

zagfles

DavidLaGuardia wrote: »

You are confusing twp different things here.

Nope...I'm not confused at all...

The reduction in NI for being in a contracted out occupationalal scheme was not consistent with the amount of rebate that was paid into a persional pension when an inidivudal contracted out.

Agreed...

The first was a reduction in recogntion that the employer was, at least, covering the amount that would otherwise have applied to SERPS and the state second pension. It didn't affect the tax liability and purely applied to NI.

Yes, so effectively a "tax free" NI rebate. Which they could then use to invest in a pension and get tax relief.

The individual contracting out of a personal pension got an amount diverted from their NI that varies with age. Again it had not bearing on the tax they paid.

But basic rate tax relief on the "employee" part of the NI rebate was added, see the link I posted above. So eg if the total age-related rebate was 14.4%, then tax relief was given on 1.6/14.4 of the rebate, as per the examples in p10-11 of the link above.

Thus treating the employee part of the NI rebate given to people in occupational schemes the same as people in personal schemes, since those in occupation schemes got the rebate in their pay, whereas those in personal schemes got it in their pension. With the exception that higher rate tax relief wasn't available to those in contracted out personal schemes, but was to those in occ schemes.

DavidLaGuardia

They are two different things here.

Also Higher rate tax relief is an addtional incentive on one's own contributions. The contributions were not from the net pay so did not need this incentive.

Ok lets deal with the "fairness"

Occupatiuonal Schemes - Full tax still paid, this is just a reduction in NI, this is not the same as "tax free pay" and was generally much smaller than the rebate applied on personal pensions which had basic rate tax added.

As you point out, they could in theory use this to put into a pension and get basic and higher tax releif but it would be LESS than the total personal benefit received by those contracting out via the personal pension option, So in some ways anting additional relief is like getting a bag of sweets than complaining when someone else with half a bag of sweets is topped up with another quarter of a bag that they have had a second helping and you havn't.