Tax Relief on AVC payments

Gadfium

Im a bit confused about this following a call to HMRC.
I currently pay into a BT pension scheme via my paygroup. In addition I make a regular contribution as AVCs, again via my paygroup. These are invested in a fund. I believe that these payments are deducted before tax and NI, and as such every £ I put in essentially has the tax relief included.

I now want to make some additional one off payments to my AVC. If I put in £8K this will automatically get 20% tax relief added, bringing the total to £9600. I then claim the additional 20% (I am a HRT payer) via HMRC.
HMRC have advised me that they could just adjust my PAYE tax code to give the additional relief. I can't see how that ends up in my pension. They advised that it was up to me to pay the additional money accrued over the year (as a result of having a higher tax coding) into the pension. I queried this as I could then claim more tax relief on the money paid to me and so on ad infinitum.
This doesn't sound right. Is it?

green_man

HMRC will adjust your code to repay the HRT that you paid on the lump sum you added to your pension. The refunded amount will not go into you pension. you need to make the lump sum the right size to allow for the the tax refund.

So if you want 10K to be added to your pension you pay 8K, it is automatically boosted up to 10K then you get 2K refund on your tax so it costs you 6K net (I think!)

Gadfium

Thanks for the reply.
So I could then take the additional money received through paying less tax and bung that into the AVC? And then claim tax relief on that?

rpc

Be careful about how your pension contributions are made.

Will these AVCs be done through payroll or by personal payment such as a cheque?

We can put one off payments through payroll in which case there is no additional relief due because it is salary sacrifice. The same would apply under a net pay arrangement.

If you are making a payment that needs tax relief, the HMRC route is correct. Rather than send you a cheque for the excess tax, they are adjusting your tax code to stop you paying that tax in the first place.

Gadfium

The additional single contributions will be made as a cheque to the pension fund.

jem16

Gadfium wrote: »

Thanks for the reply.
So I could then take the additional money received through paying less tax and bung that into the AVC? And then claim tax relief on that?

You could but really far better to think always of the gross payment as green_man says and put that into the pension in the first place. The tax refund then replaces the extra money you had to pay out with the increased gross payment.

It just gets a bit messy if you make a smaller payment, then add the tax relief later.

Gadfium

jem16 wrote: »

You could but really far better to think always of the gross payment as green_man says and put that into the pension in the first place. The tax refund then replaces the extra money you had to pay out with the increased gross payment.

Thanks for the response.
It's not always possible to do this. The additional money comes from a Share incentive Plan that my employer runs. I'm not moaning though, as the shares were bought tax and NI free (as long as they were held for 5 years). I sold them (CGT free, again another perk of the plan) and am now bunging them into my pension. So I've saved 42% on the purchase of the shares, they've nearly trebled in price and now I get an extra 20% on top as soon as they go into the pension.
:j:j