Seld Assessment and pension contributions

NordicNoir

BananaRepublic wrote: »

I believe that the employer's contribution, which is paid before tax is deducted, does form part of the annual allowance which is currently the lower of £40,000 and your salary for the year. Hence it does not disappear, given that you may need to use previous year's allowances etc.

I meant that the contribution 'disappeared' (poor wording) from the calculation of your income tax, not from your annual pension allowance! If an employee's pension contribution is deducted before tax, only the amount after the pension contribution is reported to HMRC as gross pay.

I believe that the 'tracking' of all of your pension contributions in a tax year, by HMRC, is achieved by amalgamating the returns from your various pension schemes rather than from the tax return process.

bowlhead99

MichelleUK wrote: »

I believe that the 'tracking' of all of your pension contributions in a tax year, by HMRC, is achieved by amalgamating the returns from your various pension schemes rather than from the tax return process.

Yes, on the tax return they are only trying to find out how much you have earned and what has been contributed from those earnings to pensions, charities, and other sources of relief etc etc so they can figure your tax using the basic assumption that you haven't broken any rules. HMRC will be able to find out for themselves if you have gone way over the limits.

It is like with ISAs, you don't have to say how much you have put in, HMRC will get a return from every provider who has a subscription to report, so they will find out if your contributions are valid. They won't need you to say what you contributed where and what profits you made and then separately work out for themselves if it was all above board. For the tax return process, they will just assume you haven't broken any rules on limits, until they find out otherwise via the providers' returns.

BananaRepublic

MichelleUK wrote: »

I meant that the contribution 'disappeared' (poor wording) from the calculation of your income tax, not from your annual pension allowance! If an employee's pension contribution is deducted before tax, only the amount after the pension contribution is reported to HMRC as gross pay.

I believe that the 'tracking' of all of your pension contributions in a tax year, by HMRC, is achieved by amalgamating the returns from your various pension schemes rather than from the tax return process.

That was my assumption, which means that you do have to be careful to declare any excess payments, to avoid HMRC knocking at your door.

jamesd

MichelleUK wrote: »

If a pension contribution is paid from gross pay, i.e. deducted before tax is calculated, it follows that there is no tax relief to claim, as no tax has been paid. The pension contribution has effectively 'disappeared' from any earnings for that tax year and all tax calculations, regardless of band, are based on the reduced earnings.

There would be nothing to claim on a tax return.....or have I missed something (which is quite possible!)?

[STRIKE]Yes, you missed something if there is any taxable income from any other source.

Say 5k of pay is in the higher rate range and you make 10k of pension contributions via a deduction from your gross pay. This would give you higher rate relief on 5k and basic rate relief on 5k. But what if you have another 3k of taxable income? Your base position if you don't tell HMRC about the 10k is that they will tax the 3k at higher rate. If instead you tell them, they will increase your basic rate band by the 10k and you will get the proper higher rate relief from them for the 3k as well as the 5k on which you already got it.[/STRIKE]

jamesd

BananaRepublic wrote: »

Michelle, I did say that "contributions from the employer (which are in addition to the salary, and which are taken without deductions for tax i.e. income tax and NI)", but it's easy to miss text in a thread with multiple posts.

The problem is the ambiguous meaning of paid in by your employer in your original post.

You don't tell HMRC about any contributions made before both tax and NI. This will normally be any salary sacrifice and any employer matching of contributions.

You do tell HMRC about any contributions made by your employer on your behalf after deduction from gross or net pay on which NI has been paid. You might be entitled to more tax relief on them.

The pension scheme reporting can be a bit misleading because it will probably report both pre-NI and post-NI as employer contributions, by which it means contributions that it has not added basic rate relief to because that had already been done, as well as maybe some higher rate. But this is not sufficient to get you all of the tax relief you might be entitled to if you have non-work taxable income or more than one job. If the pension scheme shows anything as employee contributions, by that it means contributions on which it has made a claim to HMRC for basic rate tax relief on your behalf - but only ever basic rate.

If we ignore possible annual allowance issues, HMRC won't mind because the effect can be under-counting of tax relief to which you might be entitled.

Your particular phrasing might also have confused your accountant if they weren't as alert to the ambiguity in your wording as I was. Be explicit with them about each portion else you might get the wrong answer due to confusion.

jamesd

For annual allowance purposes you do your calculations including the gross value of all contributions into pension scheme in your name by anyone in any way. You do not tell HMRC if you are over the annual limit unless you also have insufficient carried forward annual allowance from past years. Then you tell them just the amount that is above the allowance available to you from any eligible year and they will tax you on this excess. Last year is more complicated than usual because two allowances were available, one only for contributions in the earlier part of the tax year. HMRC has an online annual allowance calculator which allows for this quirk.

bowlhead99

jamesd wrote: »

Yes, you missed something if there is any taxable income from any other source.

Say 5k of pay is in the higher rate range and you make 10k of pension contributions via a deduction from your gross pay. This would give you higher rate relief on 5k and basic rate relief on 5k. But what if you have another 3k of taxable income? Your base position if you don't tell HMRC about the 10k is that they will tax the 3k at higher rate. If instead you tell them, they will increase your basic rate band by the 10k and you will get the proper higher rate relief from them for the 3k as well as the 5k on which you already got it.

I think I'm in the unusual position of disagreeing with you James or maybe just a poor explanation?

So lets say you have a gross salary of £48k which is £5k into the high rate band which normally kicks in at £43k.

Then, per your example, "you make 10k of pension contributions via a deduction from your gross pay."

OK, so my employer deducts £10k from my gross pay so I only receive £38k gross pay from that employment. This will reduce the net pay from that employment by the £10k (less the marginal tax that would have been suffered on an extra £10k of gross pay, which is £3k(half at 40% half at 20%).

So my net pay goes down by £7k and I have obtained all the relief I need if that was the only income I had.

If that was the only income I had, my income of £38k goes into the tax return and the final tax paid will be fine. The employer, having reduced my gross from £48k to £38k, reports the fact that I received £38k gross to HMRC. I pay the right amount of tax on a £38k income.

Now, you are saying I also have some other income source, giving me £3k of gross income. You warn that HMRC will tax this at 40% if I don't tell them that the employer gave me a deduction to my gross salary of £10k?

Why would that be the case? The employer tells HMRC that I received gross pay of only £38k. I have some other £3k income on the side. HMRC has no basis to tax the £3k at 40%, because the £38k+ £3k is only £41k and the threshold for being on basic rate tax is £43k. There is no reason I need the basic rate band to be extended to help me capture any further relief.

I state on my tax return that I received £38k gross income from my main job (which is backed up by my employer who said he paid me £38k gross) and £3k from some other source of income, giving me total income of £41k. I stick those numbers in the top of the tax return and when the numbers drop out at the bottom, the effective marginal rate on the £3k secondary source of income in my tax return will be 20%.

What am I missing?

jamesd

Yes, if the employer reports to HMRC a lower gross pay amount that will also have the effect of telling HMRC what they need to know to tax the 3k correctly. So no issue if the taxable pay shown on the payslip and P60 has that lower number on it.

NordicNoir

jamesd wrote: »

Yes, you missed something if there is any taxable income from any other source.

Say 5k of pay is in the higher rate range and you make 10k of pension contributions via a deduction from your gross pay. This would give you higher rate relief on 5k and basic rate relief on 5k. But what if you have another 3k of taxable income? Your base position if you don't tell HMRC about the 10k is that they will tax the 3k at higher rate. If instead you tell them, they will increase your basic rate band by the 10k and you will get the proper higher rate relief from them for the 3k as well as the 5k on which you already got it.

Hmmm... this does not sound like how I understand the calculation. Just off to run some numbers to get it straight in my head!

Edit: Just noticed bowlhead99's post.....feeling relieved as my calculations worked fine when I ran them through!

NordicNoir

jamesd wrote: »

Yes, if the employer reports to HMRC a lower gross pay amount that will also have the effect of telling HMRC what they need to know to tax the 3k correctly. So no issue if the taxable pay shown on the payslip and P60 has that lower number on it.

If the employer has deducted the contribution from gross pay, it is the figure after the contribution that they must show in the P60 as gross pay, the employer cannot choose to show the higher figure.