40% tax relief on SIPP fails

malcolmfowler

Help,


A couple of months ago my wife was awarded a 15K bonus and we decided to open a SIPP with the money. After tax (40%) she received 9K in her pay. We paid this into Hargreaves Lansdown who reclaimed £2,240. We also claimed the other 20% from HMRC and received a cheque last week for £2,246. This has been paid into the SIPP.


The HL marketing material says I can get all my tax back on a SIPP investment, here is the sum


£9000 Nett via pay packet
£2240 claimed by HL
£2246 received from HMRC

---

£13,486


I know that HL will claim another 20% on the HMRC payment we made into the SIPP (£450)


Where is the remaining £1064 gone and how do I get it back?


I spoke to HL and they couldn't explain it. Can anyone help?


Thanks

Your_Hero

If you paid in £9,000, then the amount going into your pension including basic rate relief is £11,250, i.e. £2,250 reclaimed by HL. Did you receive get £2240 or is it because you purchased funds and fees were deducted/fallen in value etc.?

The remainder relief is then reclaim through tax return with HMRC. You can claim up to another £2250.

You will only receive the full 20% if the whole income is higher rate tax. In other words, the £9,000 pushes the basic rate threshold higher so more of your income (£9,000 more) becomes basic rate, and so you get the 20% tax rebate. From the amount received from HMRC, it is close and possibly because of other income (such as interest from taxable savings accounts etc) that has reduced this by £4.

You've done your calculations wrong. £9,000 net payment is £11250 gross. You get another 20% of this gross figure = £2,250. Take this figure away from your £9,000 gives you £6,750. In other words, for a pension pot of £11,250, this has only cost you £6,750. This is your 40% relief (£6,750/11250 = 60%)

jem16

malcolmfowler wrote: »

Where is the remaining £1064 gone and how do I get it back?


I spoke to HL and they couldn't explain it. Can anyone help?


Thanks

Your mistake was working from net figures and not gross figures. What you really should have done was paid in £12k in the first place - ie £15k minus 20% tax relief. HL would then have added £3k basic rate tax relief and you would have claimed the other £3k from HMRC. That way your £15k contribution would have cost you £9k.

As it was your contribution meant a gross contribution of £11,250, £9k net. HL should have applied £2250 tax relief and then you claimed the other £2250 from HMRC. I have no idea where your figures come from.

kidmugsy

malcolmfowler wrote: »

A couple of months ago my wife was awarded a 15K bonus and we decided to open a SIPP with the money. After tax (40%) she received 9K in her pay. We paid this into Hargreaves Lansdown who reclaimed £2,240.

If you wanted £15k to appear in her SIPP the simple way to have done it is to have paid £12k to HL. Then HMRC would have provided HL with £3k for your pension fund, and you with £3k tax rebate. Done and dusted.

malcolmfowler wrote: »

We also claimed the other 20% from HMRC and received a cheque last week for £2,246. This has been paid into the SIPP.

That's not the normal way to do it. You will now have to inform HMRC again and they will give you another rebate. And then you can chase your tail again in an endless iteration. It's better just to recognise that if you contribute the correct 80% to HL in the first place, you get 20% credited at HL and 20% back for your wife's purse.
I recommend that you cut it short like that when you get your next rebate from HMRC.

malcolmfowler wrote: »

The HL marketing material says I can get all my tax back on a SIPP investment, here is the sum

£9000 Nett via pay packet
£2240 claimed by HL
£2246 received from HMRC

I don't know why £2240 and £2246 appear instead of £2250 each time. That is a mystery. Are you sure her original cheque was for exactly £9k? Perhaps related to this: her original £15k should surely have resulted in £8700 appearing in her net pay because she presumably pays 2% National Insurance contribution as well as 40% tax?

xylophone

As far as I know, it should be £2O reclaimed by HL from HMRC for every £80 contributed to the SIPP (so if your wife contributed £9000 that is £2250) and the same amount claimed by her from HMRC via self assessment?

http://www.youinvest.co.uk/SIPP/TaxBenefits/

malcolmfowler

OK, I'm still not getting it.


She had her pay slip with the £15,000 gross. After tax she had £9000 more than the previous month. i.e. 40% had been deducted through PAYE. BTW she is already a higher rate tax payer.


She only paid in the extra (£9000) she had received as we could not afford to pay in anymore.


So £6000 was deducted but only £4500 was refunded.

Your_Hero

malcolmfowler wrote: »

OK, I'm still not getting it.


She had her pay slip with the £15,000 gross. After tax she had £9000 more than the previous month. i.e. 40% had been deducted through PAYE. BTW she is already a higher rate tax payer.


She only paid in the extra (£9000) she had received as we could not afford to pay in anymore.


So £6000 was deducted but only £4500 was refunded.

If you want the full £15,000 to go into the pension, you need to pay in £12,000. Reclaim another 20% as a HRT, i.e. £3,000, and this makes the £9,000 you received.

£4,500 is refunded because you haven't paid in the same gross figure (i.e. you are comparing £15,000 with £11,250).

You have not lost out. Trust us, it is right.

taking_stock

ok, i'll try...


you put a total of 11250 into your pension (9000+2250 tax relief to HL).
this cost you a total of 6750 (9000 paid minus the 2250 refunded to y0ou by HMRC)


the rest of the gross amount (15000-11250 = 3750) was taxed at 40 % (as you didn't actually put it in your pension, but had it as a refund) was taxed at 40%, so 3750*.4 =2250

taking_stock

or put another way...


from your 9k net, you took £2250 in your hand and 6750 in your pension (giving 11250 gross).


or from 15k gross you put 11250 in a pension and paid tax on the remaining 3750.

jem16

malcolmfowler wrote: »

OK, I'm still not getting it.


She had her pay slip with the £15,000 gross. After tax she had £9000 more than the previous month. i.e. 40% had been deducted through PAYE. BTW she is already a higher rate tax payer.

Yes that's absolutely correct as far as income tax is concerned although I'm not sure where the extra 2% that would have come off as far as NI has gone. However that's unimportant for the moment.

She only paid in the extra (£9000) she had received as we could not afford to pay in anymore.


So £6000 was deducted but only £4500 was refunded.

As we're trying to explain to you, tax relief is worked out on gross figures. So 40% of £15k is £6k as you have correctly worked out.

To gain £6k tax relief on your pension contribution, you must then make a gross payment of £15k. As only basic rate tax relief is added by the pension provider, your net payment must be £12k.

However you have only paid in £11,250 as opposed to £15k so you are £3,750 short on your contribution.

So you are trying to claim tax relief on £3,750 that isn't due any relief as it never reached the pension. £3750 at 40% is £1500 and this tax you will have to pay.

From your first post, you then mention paying in another £2246 which was your refund from HMRC. You say that HL would claim £450 but again you are calculating that incorrectly as you are looking as you are calculating 20% of £2246. You should really be calculating 25% of £2246 as that is what would be added as tax relief - ie £561.50.

HMRC and pension providers always look at the gross figure and not the net figure as you keep calculating it on.

Triumph13

In case it's easier to understand with round numbers, for each £1000 of the bonus:
If you have £1000 taxed at 40% you get £600 cash in your pay packet. If you want to put all of it in your pension what you SHOULD do is pay £800 to HL and reclaim £200 back from HMRC to make your net cost £600 (£800 paid less £200 rebate). HL reclaim another £200 from HMRC giving you £1000 in the SIPP.
Your approach was to pay £600 to HL and both you and HL reclaim £150. You therefore end up with £750 in the SIPP at a net cost of £450.
You then tried to go around again by paying your £150 rebate to HL. Both you and HL would then claim another £37.50 from HMRC. You still don't have the full £1000 in the SIPP, but it still hasn't cost you the full £600 as you have a cheque for £37.50 in your hand.
You can then go round the loop again paying in the £37.50 and getting a cheque for £9.37. Then pay that in and get another £2.34 and on and on and on.
Or you can just gross it up properly next time.

Using your actual total of £15k gross what you need to do now is (1) Pay in another £750 to the SIPP; and (2) reclaim the tax on both this £750 and the £2250 odd you paid into the SIPP second time around - which will give you your £750 back again. You will then have your full £15k in the SIPP, less the tiny differences of a few odd pounds already noted, at a net cost of £9k cash. Bingo.