Higher-rate tax relief on pension

pulck74

First time question here.

I'm a self-employed higher-rate taxpayer with a private stakeholder pension. I've always read that, as a higher-rate taxpayer, I would get increased tax relief (40% instead of basic-rate taxpayer's 20%).

I understand that the basic-rate taxpayer gets their tax relief as a government contribution to their pension payments (e.g. £80 net becomes £100 gross). I also get that 20% government contribution automatically added to my pension payments.

However, I have never seen any evidence of the 40% tax relief. Where does this go?

I have read elsewhere that this 40% tax relief is applied when I submit my self-assessment. But again I have never received any notification or clear evidence of this 40% tax relief.

Can someone please explain to me how this works?

Albermarle

On your self assessment form there is a box for pension payments . You should fill this in with the amount contributed during the tax year ( Ican not remember if this includes the 20% tax relief that you have already received )
The self assessment calculation then takes this into account and reduces the amount of tax you pay on this amount from 40% to 20% ( assuming you have paid enough tax at 40% to cover it ) . Normally all other things being equal you should receive a tax rebate exactly = to the 20% relief already received .

pulck74

Albermarle wrote: »

On your self assessment form there is a box for pension payments . You should fill this in with the amount contributed during the tax year ( Ican not remember if this includes the 20% tax relief that you have already received )
The self assessment calculation then takes this into account and reduces the amount of tax you pay on this amount from 40% to 20% ( assuming you have paid enough tax at 40% to cover it ) . Normally all other things being equal you should receive a tax rebate exactly = to the 20% relief already received .

That makes perfect sense. Thank you!

Paul_Herring

There is no 40% relief-at-source, only 20%.

You get 20% relief when you contribute to your pension fund, you claim the other 20% from HMRC after the tax year has finished, and you file your self-assessment, and put it in your bank account (or get your tax code suitably adjusted for the year after.)

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So, for example, you contribute £80 into a pension fund, you get £20 relief making it £100 in your pension.

You claim another £20 off HMRC, which results in it costing you £60 from net pay to end up with £100 in your fund.

Albermarle

One point to be aware of is that once you fill in the SA form as above , HMRC will assume that you will make the same contribution in the next tax year . So they will change your tax code ( increase it ) so there will be no need for a rebate as you will pay less tax during the year.
If you then make a smaller contribution than the previous year , you will actually owe them tax after you fill in the SA form .

pulck74

Albermarle wrote: »

One point to be aware of is that once you fill in the SA form as above , HMRC will assume that you will make the same contribution in the next tax year . So they will change your tax code ( increase it ) so there will be no need for a rebate as you will pay less tax during the year.
If you then make a smaller contribution than the previous year , you will actually owe them tax after you fill in the SA form .

OK, understood. That's good to know as I was actually considering lower my contributions.

Dazed_and_confused

Although Albermarle's comment is spot on it shouldn't be an issue for the op as they are self employed.

pulck74

OK, but when I pay on account in July, presumably this is lowered by pension tax rebate?

Dazed_and_confused

OK, but when I pay on account in July, presumably this is lowered by pension tax rebate?

There is no "pension tax rebate". The pension contributions increase the amount of basic rate tax payable which in turn can reduce the amount of higher rate tax payable. That is how you benefit personally from the pension contributions (on top of the basic rate relief added to the pension fund).

pulck74

Sorry, I explained myself extremely badly!

What I meant was that the amount of tax on account that I'm paying in July is presumably being lowered by the fact that I'm a higher-rate tax payer contributing to a pension. Therefore, if I lower my pension contributions, my tax liability will increase for the following year. Have I understood?

Dazed_and_confused

Sort of. But it cannot impact the July POA on its own. It would have an equal impact on the January (2019) POA as well.

If your pension contributions in 2017:18 reduced your overall Self Assessment bill then yes that would normally have a knock on effect to your 2018:19 POA.

If you paid less pension contributions in 2018:19 and had a higher bill for 2018:19 as a result then the extra tax payable would be due as a Balancing Payment in January 2020. But the higher liability overall would then feed through to your 2019:20 POA.

If you want to understand the personal tax benefit of your pension contributions there is a foolproof way to check. Look at your 2017:18 Self Assessment calculation and note the total payable for 2017:18 (ignore POA, just look at the calculation).

Then start to amend your refund online and remove the pension contributions. View the updated tax calculation and note the new total. Discard the amendment without submitting it through to HMRC.

The difference between the calculations is the amount of personal tax your pension contributions have saved you.