Self-assessment confusion re: personal pension

dunroving

Aaaargh.

I recently completed a SA tax return (2016-2017) for the first time. I am (or was, last year) a higher-rate taxpayer. I don't/didn't pay higher-rate tax, however, because I pay/paid into an occupational pension, so tax relief was given at source (occupational pension contributions were paid from pre-tax income, taking my taxable income below the 40% threshold).

During 2016-2017, I also paid £7,600 net into a SIPP, which was topped up by £1,900 by HMRC. When I followed the online questions for my SA, it asked me whether I paid into a personal pension (Yes, ticked), and on page 4 it asked me how much (the gross amount; £9,500, which I typed in).

The calculated tax due at the end of my SA return was the same as I had calculated manually, and was 20% of the taxable portion of an overseas pension lump sum (£15,957) that I received in addition to my occupational income (i.e., the tax due was ca. £3,192). So far, so good. My total income over the year was below the 40% threshold, as per my manual calculations, so any taxable income I received was taxable only at 20%. That £3,192 tax bill has now been paid.

HOWEVER, I just received a notice that my tax code has been changed (increased), to include £2,131 personal pension relief. Huh? I called HMRC, and the friendly assistant said it was because on the SA return I claimed the higher rate tax relief on my personal pension contributions. This doesn't make sense to me, because (a) (I thought) I just answered the question I was asked, and (b) if I remove that part of the SA form about personal pensions, my tax due goes up to £4,065 (which is 25% of my overseas pension income).

Can anybody see what I am doing wrong here?

Dazed_and_confused

I think the process the friendly assistant is referring to is essentially HMRC estimating your current tax code based on what happened last year.

So your tax return has sorted 2016:17 and your current 2017:18 tax code is completely separate and is only concerned with this year.

You are not being the tax relief for 2016:17 again.

Will you make similar pension contributions this year and have HMRC estimated your other income, pension etc, correctly?

It could be correct but may not be, all depends on what is actually happening this current tax year.

You can always ask the friendly assistant to update it to use more up to date figures (or even remove it) if you have them.

[Deleted User]

The fact that, by removing the pension contribution from your return , the tax only increased by £873 would suggest that you were a higher rate taxpayer but perhaps not by all of the gross pension contribution of £9500. In fact it would suggest that only £4365 of your income would have been taxed at 40%. Perhaps HMRC have, on the basis that you may do something similar this year, have reduced the tax that you pay by adjusting your code number. All guesswork though.

P.S. Did you claim the 10% FID on the pension?

dunroving

[Deleted User] wrote:

<<snip>>

P.S. Did you claim the 10% FID on the pension?

I did, thanks for asking.

dunroving

Thanks, both. I did get the concept that HMRC was using last year's data to try to anticipate what will happen this year and model it via an adjusted tax code.

I'm beginning to get a better understanding of what is going on ...pending further checks of my arithmetic, it looks like I maybe was above the 40% threshold ... so I need to go back to my prospective threshold calculations for 2016-2017, because I was really trying hard not to be over the threshold. Dumb, dumb, dumb, as I really didn't need to be.

But this still leaves me with the question of whether Question 4 of the online SA return should only be filled in if you want to claim additional tax relief (i.e., if you think you should get 40% tax relief). It seems that if you make any SIPP contributions, you should simply include this in the SA return? And then the online form does the calculations to determine if you should get additional tax relief, and if so, how much? The HMRC wallah said I should have only filled in Question 4 if I wanted to claim additional tax relief on my SIPP contributions, but as per my original post, that just doesn't make sense to me ...

ETA: Not sure what the forum rules allow - am I allowed to post the following information in case someone can do a sanity check calculation for me:

Taxable pay (PAYE employer)
Income tax deducted (PAYE employer)
Pension income
SIPP payments

- I'm a single taxpayer with no additional tax credits or complicated tax stuff like dividends, etc., or work-related expenses.

Dazed_and_confused

Providing you're not identifiable by your user name there should be no issue with posting the details. Just don't say who your employer was etc, stick to the figures.

I think you must have got a trainee because there is nothing in the tax return notes which suggests you should only declare pension contributions in the way they have suggested.

Personal contributions that had tax relief in the scheme
Box 1 Payments to registered pension schemes operating ‘relief at source’

Under the ‘relief at source’ system, your pension provider claims basic rate tax relief (of 20%) on your personal contributions and adds that to your pension pot. Put the total amount in box 1 – that is, your personal contributions paid to the scheme, plus the basic rate tax relief. Include any one-off contributions you made in the year and provide the details of any one off contributions in ‘Any other information’ on page TR 7. Use the pension certificate or receipt you get from the administrator to fill in box 1 or work out the figure by dividing the amount you actually paid by 80 and multiplying the result by 100.
Example
Emma paid £700 into her pension scheme. She puts £875 in box 1 (£700 divided by 80 and multiplied by 100), which is her net payment plus the tax relief of £175 (£875 at 20%).

If you pay tax at 40% or 45% you should still fill in box 1 with the amount you paid in plus the basic rate (20%) tax relief. We will work out the extra tax relief due to you over the basic rate claimed by your pension provider.

Skibunny40

Please excuse my ignorance - what's the 10% FID?

dunroving

Skibunny40 wrote: »

Please excuse my ignorance - what's the 10% FID?

If it's what I think it is, it's the fact that until this year, only 90% of overseas pensions were taxable in the UK. (I don't know what FID stands for, though!) 10% of foreign pension income is tax-free.

Dazed_and_confused

Might be foreign income deduction?

dunroving

Dazed_and_confused wrote: »

Providing you're not identifiable by your user name there should be no issue with posting the details. Just don't say who your employer was etc, stick to the figures.

I think you must have got a trainee because there is nothing in the tax return notes which suggests you should only declare pension contributions in the way they have suggested.

Personal contributions that had tax relief in the scheme
Box 1 Payments to registered pension schemes operating ‘relief at source’

Under the ‘relief at source’ system, your pension provider claims basic rate tax relief (of 20%) on your personal contributions and adds that to your pension pot. Put the total amount in box 1 – that is, your personal contributions paid to the scheme, plus the basic rate tax relief. Include any one-off contributions you made in the year and provide the details of any one off contributions in ‘Any other information’ on page TR 7. Use the pension certificate or receipt you get from the administrator to fill in box 1 or work out the figure by dividing the amount you actually paid by 80 and multiplying the result by 100.
Example
Emma paid £700 into her pension scheme. She puts £875 in box 1 (£700 divided by 80 and multiplied by 100), which is her net payment plus the tax relief of £175 (£875 at 20%).

If you pay tax at 40% or 45% you should still fill in box 1 with the amount you paid in plus the basic rate (20%) tax relief. We will work out the extra tax relief due to you over the basic rate claimed by your pension provider.

Thank you, that's exactly what I thought, too - the way I was looking at it, every time the form asked me a question, I answered it and gave the information requested. I had read the information you have pasted above, and that's how I interpreted it. The HMRC lad (I'm showing my age, but he did sound very young) was insistent that I "had claimed 40% tax exemption on your personal pension contributions" - I said, No, I just answered the questions I was asked!

So, here are my basic details:

Scottish resident (don't think that affected anything in 2016-2017, though) Tax code S1100L
Taxable income from my P60 as an employee: £31,406 (I presume this means pay above my £11,000 personal allowance, so total pay after occupational pension contributions deducted is £31,406 + £11,000 = £42,406)
PAYE tax paid: £4,079
Taxable overseas pension income: £15,957
SIPP contributions (gross, including the 20% HMRC refund): £9,500

My calculations are as follows:
Total income = £42,406 from employer + £15,957 from pension = £58,363.
Subtract £9,500 SIPP contribution = £48,863 that is subject to tax. Subtract the £11k allowance means tax is due on £32,000 at 20% (£6,400) and due on £5,863 at 40% (£2,345), i.e., I owe HMRC £8,745 in income tax.

MSE tax calculator estimates that tax payable on an income of £48,863 is £8,742 (As above, I get something close to this with my own calculations - £8,745, consisting of £6,400 tax at 20% rate and £2,345 tax at 40% rates.)

My outstanding tax due to HMRC therefore is £8,742 or thereabouts minus £4,079 PAYE tax already paid = £4,666 outstanding tax due for 2016-2017.

Unfortunately, this is very different than both figures I get from my SA form (i.e., with and without the SIPP contributions reported), so I am completely confuzzled! I've re-read through my tax return and the numbers in there are exactly as written above.

[Deleted User]

Couple of very big mistakes!

Your income from your P60 is NOT after personal allowance. You declare £31406.

You are using what is known as the total income method of tax (yes I am old) which used to be employed in old Inland Revenue days. You must ADD the tax relief on your personal pension to the tax due (£1900)