SIPP and Tax Relief Query

ofurmatt

Let's say my employer gives me a £1000 bonus, and I'm a 40% tax payer. That means I get paid £600. If I then put the £600 into my SIPP, will I ultimately get the full £400 tax back after claiming relief and declaring this on my tax return?

It seems like my SIPP provider claims the Basic Rate relief as if that was your top rate of tax, so I guess I'm asking if HMRC knows to make up the difference.

Here's a worked example:

Pay from employer £1000
After tax deducted, I'm left with £600
Pay £600 into my SIPP
SIPP provider claims Basic Rate relief ((£600 / 80) * 20 = £150 (even though I actually paid 20% of £1000 at Basic Rate)
On my return, I have to declare £600 + £150 = £750 going into the SIPP
Will HMRC give me £250 back for the additional Higher Rate amount so I have my full £1000?

Every pension provider website I can find shows the Higher Rate relief being the same cash amount as the Basic Rate. But if that's the case, HMRC will just give me another £150 and so I only end up with £900. Am I supposed to just put £800 in the SIPP, in effect paying in the correct Higher Rate tax amount myself in anticipation of HMRC paying it back?

dunstonh

Pay from employer £1000
After tax deducted, I'm left with £600
Pay £600 into my SIPP
SIPP provider claims Basic Rate relief ((£600 / 80) * 20 = £150 (even though I actually paid 20% of £1000 at Basic Rate)
On my return, I have to declare £600 + £150 = £750 going into the SIPP
Will HMRC give me £250 back for the additional Higher Rate amount so I have my full £1000?

Treat pension contributions as if they are gross and you get tax relief on them. Not as if you are getting a bonus.

So, if you pay £1000 into the pension, you write the cheque for £800 and claim the other £200 via your tax return.

Albermarle

I struggled with this question for a while but has been answered on the forum many times.
As said above £1000 goes into your pension , you pay £800 and £200 basic rate releif is added by the pension provider ( who claim it for HMRC) . Then you contact HMRC and ask for the higher rate tax relief and they send you another £200 as a tax rebate.
So you now have £1200 and it has only cost you £800.
However as you pay a marginal rate of tax of 40% then you need to earn £1333 to have a net pay of £800 . So £1333 does not = £1200, which I think is your question?
The reason is that when HMRC do your tax calculation for the year , the higher rate relief just reduces the amount of 40% tax you pay to 20%. So you get exactly the same amount of higher rate relief as you do basic rate relief = 20%