Tax relief on pensions, higher rate tax payer

xylophone

http://www.hmrc.gov.uk/incometax/relief-pension.

"Usually your employer takes the pension contributions from your pay before deducting tax (but not National Insurance contributions). You only pay tax on what's left. So whether you pay tax at basic, higher or additional rate you get the full relief straightaway.

However, some employers use the same method of paying pension contributions that personal pension scheme payers use - read more in the section on Personal pensions"

jamesd

1.8T, you'll need to check your pay slip to find out what you need to do. Pension contributions can be done in three different ways, best to worst order:

1. salary sacrifice. These come out before income tax or NI are deducted. The pension payment is then made as an employer contribution so the pension company doesn't add anything. There is no need for you to do anything in this case because you get the tax relief automatically. You also save NI. This is the approach that would be used by larger and more modern pension schemes, particularly in the private sector, because it is the way that delivers most benefit to both employer and employee.

2. deduction from gross pay before tax, but not before NI. No need for you to do anything in this case either because the before income tax deduction gets you your tax relief automatically. Older pension schemes - trust based rather than the now becoming more common contract-based schemes - and defined benefit schemes might use this way. The pension payment will be made as an employer payment and the pension company won't add anything.

3. deduction after income tax and NI. The pension contribution will be made as a personal contribution for your part and the pension company will add 25% to give you the 20% basic rate tax relief. the employer part will be made as an employer contribution and nothing will be added. Tell HMRC the amount deducted from your pay as your contribution and tell them that is before tax relief is added by the pension provider. HMRC will increase your basic rate tax band and send out a new notice of coding to give you the tax relief. You can tell them what you expect the total to be for the current year and get the tax relief during the year. Phone or letter works fine, no need for a tax return and they won't want one from someone who has only simple things like this to deal with.

jem16

jamesd wrote: »

2. deduction from gross pay before tax, but not before NI. No need for you to do anything in this case either because the before income tax deduction gets you your tax relief automatically. Older pension schemes - trust based rather than the now becoming more common contract-based schemes - and defined benefit schemes might use this way. The pension payment will be made as an employer payment and the pension company won't add anything.

Pension payment can be both employee and employer, not just employer.

jamesd

So long as the pension place knows not to add the basic rate tax relief all is fine that way too.

1.8T

Thanks again for all the info chaps. It is a salary sacrifice scheme, so if I am grasping this correctly that means my pension contributions are made before tax but after NI, so I don't pay tax on my pension contributions?

Your_Hero

1.8T wrote: »

Thanks again for all the info chaps. It is a salary sacrifice scheme, so if I am grasping this correctly that means my pension contributions are made before tax but after NI, so I don't pay tax on my pension contributions?

Almost there. Salary sacrifice means before tax and NI. You definitely don't pay tax on your pension contributions and receive full tax relief at source, i.e. no need to claim separately.

jamesd

Salary sacrifice is before income tax and NI and you may also get some of the NI that your employer saves. It's by far the best way to get pension contributions made. You get the full tax relief immediately and should not tell HMRC about the contributions because they will already see them in the reduced monthly pay slip information and in the P60 as lower income.