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Higher Rate Tax Relief

Hi,

I'm looking for some clarification re: Higher rate tax relief in a pension.

The recent PAYE coding notice I received states my tax code for 2014/2015 will be 632L. This is calculated using £10k personal allowance - £3678 car benefit. The PAYE coding notice also states any income I earn over £38188 will be taxed at £40%. Following a recent pay rise, my salary is now £42k which means I am for the first time paying 40% on a proportion of my salary. The amount I will pay 40% tax on will be £3812 (= 42000 - 38188).

My company provides no pension scheme so up until now I have not been saving into a pension scheme and instead have been using ISAs. However now I am a higher tax rate payer, I figure it would be worth considering contributing to a pension.

The question I am trying to answer is how much should I pay into a pension to maximise higher rate tax relief? I figure the optimum amount would be £3812 as this is the amount of income I will pay 40% tax on. However, if for example I contribute £5k, would I receive 40% tax relief on the full £5k or just £3812?

Any clarification on this would be most useful.

Thanks.

Comments

  • jem16
    jem16 Posts: 19,493 Forumite
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    HairyBear wrote: »
    The question I am trying to answer is how much should I pay into a pension to maximise higher rate tax relief? I figure the optimum amount would be £3812 as this is the amount of income I will pay 40% tax on.

    You are correct but this is the gross figure. You should then contribute this amount minus 20% tax relief, so £3049.60. You would then claim the extra 20% tax relief from HMRC.
    However, if for example I contribute £5k, would I receive 40% tax relief on the full £5k or just £3812?

    Just the £3812. The rest would have tax relief at 20%.
  • jem16 wrote: »
    You are correct but this is the gross figure. You should then contribute this amount minus 20% tax relief, so £3049.60. You would then claim the extra 20% tax relief from HMRC.



    Just the £3812. The rest would have tax relief at 20%.

    Brilliant - thanks for your reply. I thought that would be the case but just needed some clarification.
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
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    In case of doubt: you write your cheque for £3049.60. The pension company claims back from the tax man so that your total in the pension will become £3812.

    You report to HMRC that you have made a gross contribution of £3812 (the bigger figure, note!). Then HMRC will give you the remainder of your rebate = £762.40.
    Free the dunston one next time too.
  • jamesd
    jamesd Posts: 26,103 Forumite
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    Do your calculation of how much to pay in based on how much arrives in the pension pot. That will be the amount you pay in plus the 25% that provides the 20% basic rate tax relief that is claimed from HMRC by the pension provider. So multiply the desired amount by 0.8 to get the amount to pay in.

    Then you tell HMRC the amount that ended up in the pension pot and they will increase your basic rate tax band by that amount. That higher basic rate tax band will mean that you'll get the basic rate relief because it'll reduce or eliminate the higher rate tax that is due.

    If you tell HMRC about the amount you estimate you'll pay in next year they will adjust your notice of coding to allow for it. You don't have to be perfect, just try not to be too far wrong either. If it turns out to be significantly different and you know it in advance you can let them know during the year and they will adjust it accordingly.
  • jamesd wrote: »

    If you tell HMRC about the amount you estimate you'll pay in next year they will adjust your notice of coding to allow for it. You don't have to be perfect, just try not to be too far wrong either. If it turns out to be significantly different and you know it in advance you can let them know during the year and they will adjust it accordingly.

    Thanks for the info. I didn't realise HMRC could change my tax code in <i>anticipation</i> of my contributions.

    I have just spoken to them and they said they are unable to do this until April after I start making the contributions. I shall call back in April to get my tax code adjusted accordingly.
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