Higher rate tax relief on pension contributions.

peterg1965

Excuse the 'noddy' post but can someone please explain how to work out the amount of tax relief at the higher and basic rates on pension contributions.

Example: (this is how I thought it worked)

Contribution: £1000
Basic tax relief at 22% = £1000 divided by 0.78= £1282 tax relief if therefore £282?

Higher rate relief at 40% = £1000 divided by 0.6 = £1667
tax relief is £667.

So in this case you would reclaim £385 (£1667-£1282) from the HMRC via self assessment.

Is this correct?

Judwin

peterg1965 wrote: »

Excuse the 'noddy' post but can someone please explain how to work out the amount of tax relief at the higher and basic rates on pension contributions.

Example: (this is how I thought it worked)

Contribution: £1000
Basic tax relief at 22% = £1000 divided by 0.78= £1282 tax relief if therefore £282?

Higher rate relief at 40% = £1000 divided by 0.6 = £1667
tax relief is £667.

So in this case you would reclaim £385 (£1667-£1282) from the HMRC via self assessment.

Is this correct?

Not quite. Tax is calculated on the Gross amount, not Nett. If you write out a cheque for £1000 and give it to the PPP people, the PPP people then Gross it up to reclaim the Basic tax from the tax man, making the Gross contribution £1282.

Then on your tax return, you put down the £1282 figure, and this results in your personal tax allowance at the basic rate being increased by £1282.

If you are a HRT payer, this causes your tax liability to be reduced from 40% to 22% on that £1282, so the government will refund you £230.76 (18% of £1282)

So when it comes out of the wash, a gross contribution of £1282 costs you £769.24 (£1000-£230.76), which is 60% of £1282. The tax man pays the other 40%.

peterg1965

Judwin wrote: »

Not quite. Tax is calculated on the Gross amount, not Nett. If you write out a cheque for £1000 and give it to the PPP people, the PPP people then Gross it up to reclaim the Basic tax from the tax man, making the Gross contribution £1282.

Then on your tax return, you put down the £1282 figure, and this results in your personal tax allowance at the basic rate being increased by £1282.

If you are a HRT payer, this causes your tax liability to be reduced from 40% to 22% on that £1282, so the government will refund you £230.76 (18% of £1282)

So when it comes out of the wash, a gross contribution of £1282 costs you £769.24 (£1000-£230.76), which is 60% of £1282. The tax man pays the other 40%.

Thank you, makes sense now. :beer:

gavin.oddy

Hi. This reflects my understanding and also illustrations on every web site on the topic. Unfortunately, I cannot persuade the folks I speak to at HMRC to give higher tax relief on the gross amount of the contribution - they say it has to be 20% of the net amount, i.e. the amount of taxed income I paid into the pension. They say that the only way for me to get them to change their mind is to write to them, and then I will need to quote the relevant legislation or tax rules (e.g. on the HMRC website). I've tried searching on the HMRC website but it's a bit of a quagmire. Can you (or anyone!) give me a reference to where the calculation of higher rate tax relief on personal pension contributions is specified?

jem16

gavin.oddy wrote: »

Can you (or anyone!) give me a reference to where the calculation of higher rate tax relief on personal pension contributions is specified?

from HMRC's own website - read the Relief at Source section.

http://www.hmrc.gov.uk/pensionschemes/annual-allowance/diff-methods.htm

It clearly mentions gross amount to claim tax relief.