2 questions on tax relief for a newbie

isayhello

Hi,

Am just starting to learn a bit about pensions and trying to understand tax relief. As I understand it, if as a basic rate tax payer, I pay £80 into a work pension or a SIPP, £100 is what is actually added to the pot.

Is this automatically done behind the scenes and we just take it for granted that the pension provider takes care of all this?

If you're a higher rate tax payer paying into a SIPP, and you want to claim the extra 20% tax back, is this the responsibility of the individual then, you have to complete a form? how do you workout the exact amount you need to claim back.

Many thanks for help with newbie questions.

OldMusicGuy

For basic rate the pension provider will add it to your pension pot (there can be a bit of a time lag in the money actually getting into your pension pot). For higher rate relief you have to claim that back yourself through self assessment. You can also talk to HMRC and get them to adjust your tax code to take account of your higher rate relief which you then balance out at the end of the year on your tax return.

Read this page here: https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief.

Dazed_and_confused

A higher rate payer doesn't actually claim an extra 20%.

The gross contribution (£100 in your example) increases the amount of basic rate tax you can pay which in turn reduces the amount of higher rate tax payable.

So if you are only just over the higher rate limit you might not get an extra 20% back in tax.

AlanP_2

If it is a workplace scheme and the pension contribution comes out of GROSS PAY before tax is taken the £100 from your example would go to the provider and your take home (NETT PAY) would be £80 less than if you didn't have a pension.

Same overall effect but we have seen questions on here about "why does the £100 pm taken out of my salary not end up being £125 when I look in my pension account".

isayhello

Thanks @AlanP what do you mean about we have seen those questions on here? are there examples then when the provider screws up and the extra £25 in tax relief isn't added to the pension pot?

isayhello

Dazed_and_confused wrote: »

A higher rate payer doesn't actually claim an extra 20%.

The gross contribution (£100 in your example) increases the amount of basic rate tax you can pay which in turn reduces the amount of higher rate tax payable.

So if you are only just over the higher rate limit you might not get an extra 20% back in tax.

Hi, in my example, it's not a work place scheme where the money is taken out before tax. It's simply an independent SIPP where I would look to add money myself.

For example, if a person is paid 50k and they contribute 1k, then an extra £250 is added to the pension pot as basic tax relief if I understand correctly. How is the extra tax relief calculated for a 40% tax payer, that's the bit I'm trying to figure out.

I understand that the process of reclaiming would be with a self assessment tax form now.

JCUK

I just write to the tax office at the end of the financial year, enclosing a list of my SIPP contributions, and about 6 weeks later they write back with details on how to claim through their website. (I'm PAYE so don't fill in a self-assessment form.) It was very straightforward. The address to write to was on my SIPP platform's website.

msallen

JCUK wrote: »

I just write to the tax office at the end of the financial year, enclosing a list of my SIPP contributions, and about 6 weeks later they write back with details on how to claim through their website. (I'm PAYE so don't fill in a self-assessment form.) It was very straightforward. The address to write to was on my SIPP platform's website.

No need for all that. You can simply ring them and say how much you intend to contribute this tax year and they will amend your tax code within a day or two. If your actual contributions don't match what you said come next April, they will correct it automatically (or as in my case last year send me a small refund).

AlanP_2

isayhello wrote: »

Thanks @AlanP what do you mean about we have seen those questions on here? are there examples then when the provider screws up and the extra £25 in tax relief isn't added to the pension pot?

That's my point - if it is a workplace scheme and you contribute a £100 that is all that gets passed to the provider by your employer.

This reduces your taxable pay by £100, which (if a BR taxpayer) reduces your take home by £80, or reduces it by £60 if you are a HR taxpayer (and haven't reduced taxable income below HR threshold).

That is the same as you putting £80 into a personal pension / SIPP and it getting made up to £100.

It's not a case of provider "screws up" but people not appreciating how the tax element is dealt with.

isayhello

Thanks @AlanP

That is the same as you putting £80 into a personal pension / SIPP and it getting made up to £100.

So just to check I understand the answers I was confused about, if it's a SIPP and not a workplace pension, you contribute your net amount and the tax relief is added up e.g. from 80 to 100 pounds by the provider and this should just happen by default and you can trust this process. I was just wondering if there's cases where they might not do it properly and an individual could miss out on tax relief.

isayhello

Thanks @msallen and @JCUK

So an example would be great @msallen if you call the tax office at the start of the year and tell them that you plan to contribute say £5000 over the year, do they adjust your tax code to give you an extra 20% tax relief on that money then?