Pension 40% tax relief question

financenov

I have just started a private pension plan, and I am confused about how much can be claimed back on my tax return. I pay tax at 40% on around £15000 of my income.

I understand that if I pay in £500 monthly, this is automatically grossed up to £625 by the pension scheme. This makes sense as a taxable income of £625, taxed at 20%, has £125 taken in tax.

I also understand that, as a higher rate taxpayer, I am able to claim back the remainder on my tax return.

However, all of the calculators I have seen online tell me that the amount I can claim back is another £125. So the total tax claimed back is £250.

But, to get a net (after 40% tax) of £500, the taxable income would need to be £833.33, so the tax taken in £333.33

Can I actually claim back £208.33 on my tax return? Or just £125?

Thank you.

gadgetmind

You claim back £125 on your tax return.

Total gross pension contribution is £625.

Of this, £125 comes from HMRC directly into the pension, £125 you put in alongside your own £375 and then claim back from HMRC.

So, you put in £375 (which is 60% of the £625), and the remaining £250 is done in two chunks, one direct and one via mechanism above.

CLAPTON

if you want to pay 500 net of 40% tax then you need to actually pay in 666.67 (i.e. 500 x4/3)


so the 666.67 will be grossed up by your pension comapny to 833
and the tax man will give you back 20% of 833 = 166.67

so your net contribution is the 666.67 you actually paid less 166.67 refund = 500

somethingcorporate

You should put in your grossed up contribution (£625) on your tax return. It should automatically calculate the relief but it will be £125.

financenov

Thank you all so much for your replies, it makes sense now - I was looking at it from the wrong angle!

So, if I wanted to be ambitious and 'make use' of all the 40% tax on £15000 of income, I would need to pay £12000 into the pension, HMRC would add £3000, then I claim £3000 on the tax return.

Obviously, I understand that any funds paid into the pension remain there, and the claim either comes back as a one-off payment or a change in tax code.

somethingcorporate

financenov wrote: »

Thank you all so much for your replies, it makes sense now - I was looking at it from the wrong angle!

So, if I wanted to be ambitious and 'make use' of all the 40% tax on £15000 of income, I would need to pay £12000 into the pension, HMRC would add £3000, then I claim £3000 on the tax return.

Obviously, I understand that any funds paid into the pension remain there, and the claim either comes back as a one-off payment or a change in tax code.

Correct, I'd expect for those figures they would change your tax code. You then need the discipline to make sure that extra £250 a month ends up in your pension as obviously it will just impact your net pay, unlike the 20% uplift that automatically hits your pension.

financenov

Thanks again.

somethingcorporate

I forgot to mention, you can just ring the tax office and they will change your tax code in advance, you don't need to wait until you submit the return (i.e. at the end of this tax year).

You can just use predicted figures. We did this yesterday for my wife and they were fine adjusting the code for an almost identical value to yours for this year.

gadgetmind

somethingcorporate wrote: »

you can just ring the tax office and they will change your tax code in advance

I tried that but they insisted that I get written proof of investment from my pension company and it took quite a few weeks to get my code changed.

somethingcorporate

gadgetmind wrote: »

I tried that but they insisted that I get written proof of investment from my pension company and it took quite a few weeks to get my code changed.

That was not the experience we had yesterday.

My wife received her tax coding for next year with an estimated £3k pension contribution this year, we rang them up and told them it would be £13.6k and they said a new notification would be in the post, even though we still have £4k of that £13k still to go in!

gadgetmind

Maybe they just don't trust me?