Additional tax relief calculation

penwise

Extra tax relief needs reclaimed from HMRC. Could someone do a worked example of how this is calculated using the following figures-

Salary gross :@47000
Total pension contribution : @7000
Annual allowance : 11000
Salary over 430000 taxed at 40%

Thanks

HappyHarry

penwise wrote: »

Extra tax relief needs reclaimed from HMRC. Could someone do a worked example of how this is calculated using the following figures-

Salary gross :@47000
Total pension contribution : @7000
Annual allowance : 11000
Salary over 430000 taxed at 40%

Thanks

Assuming:
1. You are using 2016/17 tax allowances and
2. You are making a gross personal pension contribution of £7,000 from your take home pay:

You should be liable for tax as follows:
£0 - £11,000 taxed @ 0%
£11,000 - £47,000 taxed at 20% (The pension contribution increases your basic rate tax band)
So total tax due is £7,200

You will probably pay:
£0 - £11,000 taxed @ 0%
£11,000 - £43,000 taxed @ 20%
£43,000 - £47,000 taxed @ 40%
So total tax paid will probably be £8,000

You may be able to claim back £800

penwise

Thanks for doing that and getting back so quickly.

bowlhead99

The other way to think of it is:

Effectively by putting £7k gross into a pension you only need to have paid tax on the first £40k of income not the whole £47k. And £11k of that £40k was covered by your personal allowance, so the total tax payable for the entire year was only £29k x 20% = £5800.

However you will generally have paid via your employer PAYE, a total of £8k tax on the £47k gross salary (£11k @ 0%, £32k @ 20%, £4k@ 40% = £8k) like Harry says.

But when you contributed to the pension scheme, to get the desired £7k gross into the scheme you probably paid only £5600 cash into it out of your net pay - and the pension provider grossed it up by 100/80 to give you automatic basic rate tax relief of £1400 and leaving £7000 total in the pension account

So really you need to pay £5800 total tax for the year as a whole, but you probably paid £8000 out on PAYE (£2200 too much) and only got £1400 back inside the pension, so what HMRC still owe you is £2200-1400 = £800, which is what Happy Harry thinks you are owed too.

Note, this is assuming the way you got the £7000 gross into the pension was by contributing £5600 from net pay and having the pension provider turn it into £7000 with BR relief at time of contribution (or shortly thereafter).

If instead you got the £7000 into the pension wrapper by the less-common route of having your company contribute it gross so you never had to pay any tax on that £7000 in the first place, then you will have only paid £5800 for the year as a whole, and as that's the correct amount of tax for someone with £40000 of taxable income, there is nothing extra to pay and nothing to refund either.

penwise

Thanks for that - it always really helps my understanding to see the calculations.