reclaiming tax on pension contributions

ikorodu

The calculation arrived today .

The cheque was for a refund of over paid tax as I didn't claim any telephone expenses last tax year .

So I still await an answer to my April letter regarding pension tax relief.

ThrownOutTheAsylum

I've claimed a few times, so let me explain how it works:

This is for payments into personal pensions from post-tax PAYE salary only. Payments taken out by your employer before you get paid are different.

Your fund administrator will gross your payment up for base rate tax (ie add back the base rate tax paid to give your payment), put that into your fund (less expenses) and claim the base rate tax from HMRC. For each £100 you pay in:

• You send your pension administrator £100.
• At the current base rate of 20%, the nominal tax is £25 with £125 income [£100/(1-20%) = £125, £125 x 20% = £25 and £125 - £25 = £100]
• Your pension administrator/company puts £125 into your pension and gets £25 from HMRC.

You seem to understand this bit.

If you don't pay any higher rate tax then there's nothing more to be done.

If you pay higher rate tax then you can either include the amount you paid in your Self Assessment form or contact HMRC direct to claim a refund of higher rate tax now, as you have done. The calculation is made by increasing your base rate tax band by the gross amount you paid (£125 in the above example); this has the effect of taking the gross amount (or, if lower, the amount actually taxed at 40%) out of higher rate tax (40%) and into base rate tax (20%), in the example reducing your tax bill by £125 x (40% - 20%) = £25, which is 25% of the amount that you paid your pension administrator..
Thus, for each £100 you pay your pension administrator, you get £125 less charges in your account and a cheque or tax reduction of £25, giving a net gain of £125 - £100 + £25 = £50, which is the higher rate tax on your gross contribution of £125.

So "Can anyone tell me what higher rate tax I should be due back on a gross (ie including basic rate tax relief)contribution of £694.95?" means that you should have paid across £555.96 and should be credited with or repaid £138.99 (25% of £555.96) provided that your income originally exceeded the higher rate threshold be at least £555.96.

That you have a figure for less, £56.11, indicates that either HMRC are collecting underpaid tax from something else or your net pay has only exceeded the higher rate threshold by £280.55 (£56.11/(40%-20%)).

That's my first bid in the auction.