Private Health Insurance Benefit And Pension Tax Relief

Mr.Saver

My employer has started to provide private health insurance benefit to all employees. I've been informed that the employer will pay for the cost of the benefit, but I'll need to pay tax on the cost at my income tax rate. Being a higher rate taxpayer, I will need to pay 40% tax on the cost of the private health insurance benefit.

If I want to avoid the 40% tax, can I pay the different between my income and the HRT threshold plus the equivalent amount of the benefit cost into my pension, and then get 40% tax relief on all of that?

For an example, if I earn £50,000 before tax in the 2018/19 tax year, and the benefit costs £600 per year. Can I pay £50,000 - £46,350 + £600 = £4,250 gross (£3,400 net) into my pension in the same tax year, and then claim an additional 20% tax relief on the gross pension contribution?

Thanks.

Dazed_and_confused

Tax relief (over and above the basic rate relief added by the pension company) for personal pension/SIPP contributions is allowed by increasing your basic rate tax band by the gross amount of the pension contribution.

So if you paid £4,250 gross then your basic rate band is increased (current tax year outside of Scotland) from £34,500 to £38,750. This is on top of the Personal Allowance.

Your tax is then calculated using the higher basic rate limit so you pay more tax at basic rate and less (or none) at higher rates.

Mr.Saver

Dazed_and_confused wrote: »

Tax relief (over and above the basic rate relief added by the pension company) for personal pension/SIPP contributions is allowed by increasing your basic rate tax band by the gross amount of the pension contribution.

So if you paid £4,250 gross then your basic rate band is increased (current tax year outside of Scotland) from £34,500 to £38,750. This is on top of the Personal Allowance.

Your tax is then calculated using the higher basic rate limit so you pay more tax at basic rate and less (or none) at higher rates.

So what is the tax rate for the benefit if I earn exactly £46,350, no pension contribution, and the benefit is £600? Is it 20% because I'm in the basic rate band? Or is it 40% because the benefit are in the higher rate band? I couldn't find any information about those edge cases.

If the answer to the above question is 20%, then in the £50,000 income example, I don't need to pay £4,250 gross into my pension to avoid paying the 40% higher rate. I only need to pay £3,650 gross into my pension, so my basic rate band is increased from £34,500 to £38,150, and I don't need to pay tax at higher rate, because my income £50,000 is within the £11,850 allowance + £38,150 basic rate band. Am I correct?

Dazed_and_confused

40%.

Benefits in kind are just additional income, the only real difference to say a bonus or payrise is that you have a different tax code to ensure you pay tax on the benefit.

The overall tax is calculated on your total taxable income. So if that is £46,350 then you won't pay any higher rate tax (based on current tax year and that you're not Scottish resident for tax purposes).

If your taxable income is say £47,000 then you would normally pay higher rate tax on £650, the bit over the standard higher rate limit. That has nothing to do with having a company benefit, that is just an element of your total taxable income.

But if you contributed £5,000 (£4,000 actually paid plus £1,000 tax relief added to the pension fund) into a personal pension/SIPP then your basic rate threshold would be increased by £5,000 so there would be no higher rate tax payable.

Mr.Saver

Dazed_and_confused wrote: »

40%.

Benefits in kind are just additional income, the only real difference to say a bonus or payrise is that you have a different tax code to ensure you pay tax on the benefit.

The overall tax is calculated on your total taxable income. So if that is £46,350 then you won't pay any higher rate tax (based on current tax year and that you're not Scottish resident for tax purposes).

If your taxable income is say £47,000 then you would normally pay higher rate tax on £650, the bit over the standard higher rate limit. That has nothing to do with having a company benefit, that is just an element of your total taxable income.

But if you contributed £5,000 (£4,000 actually paid plus £1,000 tax relief added to the pension fund) into a personal pension/SIPP then your basic rate threshold would be increased by £5,000 so there would be no higher rate tax payable.

Thank you, this is very helpful.