Private pension - how does the tax relief work?

Type_45

Hi all,

Is anyone please able to very briefly explain how/when you get tax relief on a private pension?


So I put some of my (already taxed) money into my SIPP. Does the SIPP provider contact the taxman and then put money in there for me to make up for the tax I already paid on it?

I have no idea how this works...



It's a lot simpler when your workplace pension takes your pension out of gross pay, but I don;t have a workplace pension. Only my private one.

JustAnotherSaver

Glad you asked this so i'm only posting for notifications.

One i did wonder about if you don't mind me hijacking, is when you read the pros & cons of the LISA vs pension.

I always read that the pro of a pension is tax relief. In an ISA your money is already taxed.

Could someone explain to me why this is a pro of the pension rather than a con?

When i was a kid, tax was 17.5%. I'm sure some of you remember it lower than that It's now 20%. So if i pay in to an ISA then i pay 20% tax & that's it job done.

However when i come to retire in 30-40 years, i doubt the tax is going to be 20% or less, so i'll actually end up paying more tax on it when i take it out of a pension (rather than ISA) & therefore it's surely a pension con, not a pension pro?

YorkshireBoy

JustAnotherSaver wrote: »

When i was a kid, tax was 17.5%. I'm sure some of you remember it lower than that It's now 20%.

I think you may be confusing VAT with income tax!

xylophone

https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/tax-relief-and-contributions

Your pension provider will claim basic rate tax relief and add it to your pension - if you are a higher rate tax payer, you will need to claim the additional relief from HMRC.

http://www.hl.co.uk/pensions/interactive-calculators/tax-relief-calculator

JustAnotherSaver

YorkshireBoy wrote: »

I think you may be confusing VAT with income tax!

:rotfl::rotfl::rotfl:

Let's just pretend I never asked that question

Type_45

Indeed. Can you please not hijack my thread with nonsense. What you were asking isn't even related to what I started this thread for.

Triumph13

Type_45 wrote: »

Indeed. Can you please not hijack my thread with nonsense. What you were asking isn't even related to what I started this thread for.

The nonsense is much more entertaining than yet another instance of asking a question that has already been asked dozens of times and could easily be googled, but since you insist:
You pay £80 into your private pension. The provider contacts HMRC and claims £20 from them to bring it up to £100. If you are a higher rate taxpayer you phone HMRC (or wait and do it via your tax return) to tell them you've made a £100 gross contribution and they pay another £20 of tax relief back to you - not to the pension.
When you retire you get 25% tax free and the rest is treated as taxable income when you take it.
Now back to the entertaining nonsense please!

Type_45

Thank you very much, Triumph13. I really appreciate that.


Cheers! :beer:

Number75

When you phone HMRC they won't just send you a cheque for £20 thought.

Well, they might... if it's the end of the tax year, then they will reconcile your tax around August time and you'll get a P800 form (think it's P800!) showing that you overpaid £20, with a cheque attached.

But if you ring them during the tax year, they'll adjust your personal tax code. So instead of getting 11500 tax free, you'll get a higher allowance before paying tax, so you get the equivalent extra take home pay over a year of an extra £20. Make sure you stick that in your pension!!

kempiejon

I believe one only pays tax on earning above the personal allowance - £11,500 this year yet will get tax rebated on all contributed to a maximum of their relevant earnings for the year.

Paul_Herring

kempiejon wrote: »

I believe one only pays tax on earning above the personal allowance - £11,500 this year yet will get tax rebated on all contributed to a maximum of their relevant earnings for the year.

Indeed.

In much the same way that someone who has no earnings at all can contribute £2,880 and get it grossed up to £3,600 via the same way.

But also presupposes
1) you can actually contribute up to your income for the year,
2) that it's below £40,000 (unless you have some to carry over from previous years)