40% Tax relief on a Pension when earnings are being taxed with a ‘K’ code

Quill

Hi,

Could anyone clarify this?

I’m 65 and semi-retired. During tax years 2011/12 and 2012/3 I didn’t pay enough tax, so thisyear HMRC are collecting the shortfall (£2173) using a ‘K’ PAYE code. This year I expect to earn £42000. Normally the tax due on this would be about£6644. My understanding is that HMRCare using the ‘K’ code because they want to collect £8817 this year (6644 + 2173)and they couldn’t do this by just reducing my personal allowance to zero andtaxing me at the lower rate on everything because this would only raise £8400. The ‘K’ code means that in addition toremoving all my tax free allowance, part of my income this year will be taxedat 40% instead of 20% (ouch). Thequestion is, can I offset this 40% tax against a pension contribution?

Last year some of my earnings were in the higher rate bandso I offset some 40% tax against a private pension by making a lump sumcontribution. The pension provider gaveme the tax relief at the lower rate and HMRC gave me the tax relief on the higherrate. I’m not sure whether 40% tax that’s been collected this year using a ‘K’code can be treated the same way because if it had been collected by HMRC inthe correct tax year they might have only reduced my tax free allowance andcollected the tax at the 20% rate.

Thanks

jem16

Quill wrote: »

I’m 65 and semi-retired. During tax years 2011/12 and 2012/3 I didn’t pay enough tax, so thisyear HMRC are collecting the shortfall (£2173) using a ‘K’ PAYE code. This year I expect to earn £42000. Normally the tax due on this would be about£6644. My understanding is that HMRCare using the ‘K’ code because they want to collect £8817 this year (6644 + 2173)and they couldn’t do this by just reducing my personal allowance to zero andtaxing me at the lower rate on everything because this would only raise £8400. The ‘K’ code means that in addition toremoving all my tax free allowance, part of my income this year will be taxedat 40% instead of 20% (ouch). Thequestion is, can I offset this 40% tax against a pension contribution?

Based on your earnings of £42,000, only £550 would be able to get tax relief of 40%.

Last year some of my earnings were in the higher rate bandso I offset some 40% tax against a private pension by making a lump sumcontribution. The pension provider gaveme the tax relief at the lower rate and HMRC gave me the tax relief on the higherrate. I’m not sure whether 40% tax that’s been collected this year using a ‘K’code can be treated the same way because if it had been collected by HMRC inthe correct tax year they might have only reduced my tax free allowance andcollected the tax at the 20% rate.

Not as far as tax relief on pension contributions is concerned as that's based on your earnings in the tax year that you contributed. Paying back underpaid tax does not increase those earnings.