Too much tax relief on pension contributions?

gterr

I think I may have been credited with too much tax relief on last year's SIPP contributions. I pay basic rate tax, and contributed less than my earned income to my SIPP - £5000 to be precise. This has been grossed-up now. However, I now suspect that when I add all my income together and subtract my personal allowance I'm going to have a tax bill lower than the amount of tax relief I 've received. (I am self-employed so do self-assessment tax returns.) It's going to be a close call either way. what should I do if I find I've claimed too much relief?

JasonPr

You can make a gross contribution of 100% of your earnings, even if that means you receive more in tax relief than you'd have paid in tax.

In other words, with the personal allowance being 10k in 2014-15, if you had earned 10k that year, you could have made a contribution of 8k, received 2k tax relief without any tax being due on your 10k if you had not made a pension contribution.

gterr

JasonPr wrote: »

You can make a gross contribution of 100% of your earnings, even if that means you receive more in tax relief than you'd have paid in tax.

In other words, with the personal allowance being 10k in 2014-15, if you had earned 10k that year, you could have made a contribution of 8k, received 2k tax relief without any tax being due on your 10k if you had not made a pension contribution.

That's what I thought, and would be wonderful if true. However, browsing the web last night I came across several sites saying the equivalent of this:


Basic rate taxpayers

If you pay basic rate income tax – 20% in 2014/15 – your pension provider can claim back 20% from HMRC for each pound you contribute to your scheme. This means that for every £80 you pay, you end up with £100 in your pension fund. You are only eligible for tax relief at 20% to the extent that you have taxable earnings falling within the basic rate tax band that match or exceed the gross contribution (£100 in this example).


https://www.barclaysstockbrokers.co.uk/Accounts/investing-for-retirement/tax-benefits-of-pensions/Pages/tax-relief-on-contributions.aspx



And in a way this makes sense, because you can only claim 'relief' if you have been liable for the tax in the first place. Until I'd come across the statement above (and a few other similar ones I found later) I'd thought that I ticked the right boxes: Basic rate tax payer; contributions less than total earnings; contributions within annual allowance. Now I'm not so sure. Could someone clarify?


If I've made a mistake I doubt I am the only one.

jem16

gterr wrote: »

That's what I thought, and would be wonderful if true.

It is correct.

Probably best to use HMRC's own website http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM05200060.htm ;

For most people the amount of tax relief they can have on their pension contributions is limited to 100% of their relevant UK earnings that are chargeable to income tax for the tax year

The important bit is chargeable to income tax - if within your personal allowance your earnings are still chargeable to income tax but at 0%.

gterr

Brilliant. Thanks! Will stop over-thinking on this one now.


Just wonder what the statement I highlighted above actually means, then?

gterr

Sorry to reply to own post, but here's another statement, from a SIPP provider:


Contributions are relieved at the marginal tax rate only to the extent that such tax has been paid in the tax year of contribution. The annual earnings limit for the 2013/14 tax year was £50,000. In tax year 2014/15 contributions are limited to £40,000. You can also carry-forward unused relief from the three previous tax years prior to the current one by back-applying the appropriate limit.


So this really does suggest to me that I may have received too much tax relief on my pension contributions, since the amount of relief is likely to exceed the amount of tax I will be paying for the 2014/2015 year. Can someone interpret this statement (and the previous one from Barclays I quoted earlier) in a different way - one that sets my mind at rest?

xylophone

Contributions are relieved at the marginal tax rate only to the extent that such tax has been paid in the tax year of contribution. The annual earnings limit for the 2013/14 tax year was £50,000. In tax year 2014/15 contributions are limited to £40,000. You can also carry-forward unused relief from the three previous tax years prior to the current one by back-applying the appropriate limit.

The above relates to Annual Allowance and carry forward relief.

See http://www.hl.co.uk/pensions/sipp/pension-carry-forward

You can have earnings below the rate at which you start to pay tax and yet receive tax relief at source at 20%.

You can have no earnings at all and yet receive relief at source of 20% on a contribution of £2880 - the provider will claim the relief of £720 and add it to your pension.