SIPP Tax Relief Calculation error?

chadwick2011

Hi all, first time poster, long time lurker.

I've contributed a lump sum to a SIPP and I've just received the tax code change for 2012/2013 to take account of it and I simply cannot work out how HMRC have come to the relief figure that they have.

I'll be calling them tomorrow morning, but I want to get everything straight in my head first, but I cannot find anywhere on the internet that explains step by step how you get from a net contribution to a tax code.

For what it's worth I think it goes like this...

Net contibution = £26,500
Gross contribution = £26,500 / 0.8 = £33,125 (matches my SIPP providers gross calcuation)
High rate (40%) rebate = £33,125 - £26,500 = £6,625
Relief required = £6,625/0.4 = £16,562
Total Tax Free amount = £8,105 + £16,562 = £24,667
Tax Code = 2466L

HMRC have caluclated it as 1857L with a £10,476 SIPP relief figure.

So to pre-empt some questions...
- This is my one and only SIPP contribution this tax year
- My personal allowance is the standard 810L
- My occupational pension contribution will be £9,218 so combined with the £33k, it is lower than the £50k annual limit.
- My taxable earnings for the year (after personal allowance and occupational pension) is £79k so more than enough high rate tax paid (£17k via PAYE) to claim back the full amount of relief.

I've been contributing to a SIPP now for the past 4 years and I've always agreed with the HMRC tax relief calculation... but I'm stumped with this one... in addition, my wife has also had hers back and her calculation is also signicantly under what I think it should be... can anyone out there shed some light on this? Have I made a rookie error, is there some obscure tax change this year or are HMRC just trying it on this year to reduce the amount of relief being paid?

Thanks in advance.

Dazed_and_confused

Did you tell hmrc your taxable earnings would be 79k? If so this might have confused things as they normally work on p60 details which if I've understood you correctly would actually be 87k this year.

Have you changed employers in the past few years? When they worked out your original code for this year it was about a year ago and the latest p60 they would have had was for
2010:11. What did your p60 show for 2010:11?

chadwick2011

Yes. I told them the amount of taxable earning and even calculated for them the amount of higher rate tax paid. Not changed employers in 11 years.

I guess first question is that given the situation I've presented, is the tax code I've calclualted correct (i.e. I've not made any errors in my working out?)

Dazed_and_confused

on taxable salary of 87k your figures do look correct.

A simple way to check if the code is correct is to work out your tax due longhand eg taxable salary less allowance = amount to pay tax on @ rates relevant to you (including extended basic rate band for sipp) then compare this against the hmrc paye calculator using expected pay at end of march (month 12) and tax code 1857L you have been sent

did the coding notice itself include any other detail about the 10476?

how much did you earn in 2010:11?

one minor thing is tax code looks wrong simply because figures dont add up
allowance 8105 + 10476 = 18581 = code 1858 not 1857

nomunnofun

Bit of a mystery and I also find your calculations correct. I agree with Dazed and Confused that your salary for 2010/11 may be relevant - HMRC may have an incorrect estimate of your earnings in their system and, based on that, may not be allowing 40% relief on all of your gross contribution. Other than that.......

chadwick2011

All, thanks for the help. I have cleared up the problem.

Both my code for this year and next year, as well as my wife's code for this year and next year had had the taxable gross income recorded incorrectly. HMRC had applied the personal allowance and recorded that number as the taxable gross. So any subsequent calculations again appled the personal allowance.

I told the operator to flag this to her supervisor. Two difference tax offices applied exactly the same error to calcualtions for both this year and next year implies there's a sytem error somewhere.

Dazed_and_confused

I have to say I think you had contributed to this by the way you referred to your taxable income net of personal allowance - your taxable income looks to be 87k, the personal allowance does not alter this.

It looks as though you just missed the deadline to get the benefit of the higher code through your March salary
http://www.hmrc.gov.uk/manuals/pommanual/PAYE11060.htm

chadwick2011

Perhaps. Although I did clearly state:
- Taxable Gross to date
- Predicted Taxable Outcome at the end of the year
- Predicted Taxable Gross at end of year - Personal Allowance
- Predicted Basic Rate tax paid by end of year
- Predicted High Rate tax paid by end of year

I also include my own calculation of the tax code.

I know it sounds a bit OTT, but each year I always get a response back after my first letter asking for some extra information. Each line above has been asked for at least once over the last 4 years, so I try to pre-empt any questions. Although this year was a good one, they asked whether my SIPP contribution was pre or post tax and whether it was an occupation pension. Never saw that one coming so next year I'll have to add a line that pre-empts those questions also.

My aim is to once in my life get a tax code changed in my favour without having numerous response letters asking for further details.