Higher rate tax relief - how does it work?

centaurandrew

Hi there, quick question on higher rate tax relief.

If I earn £1 over the higher rate tax threshold, but have contributed £2000 to my pension during that tax year, do I qualify for tax relief on the full £2000 or just £1 of it?

I can't find any regulations - only those stating that "higher rate tax payers are entitled to 40% relief" which could be interpreted as being on the full amount.

Thanks in advance to anyone who can direct me to some better regulations / guides?

Dazed_and_confused

£1, although in reality you almost certainly wouldn't get a tax refund because of how the PAYE tax system works.

There is no extra 20% relief as such, qualifying pension contributions made yourself into a relief at source scheme such as personal pensions and SIPP's increase the amount of basic rate tax you can pay.

Which in turn reduces the amount of higher rate tax payable.

So in your example your basic rate limit would be increased by £2,000 (or £2,500 if you mean your contribution is £2,000 before the 25% uplift) but that only reduces the higher rate tax payable by £1. Saving you 20p (more if you are Scottish resident for tax purposes).

centaurandrew

Sorry - I should say what if that £2000 is paid into a non-relief at source pension, such as a personal SIPP?

Dazed_and_confused

That is usually a net pay contribution and there is never any tax relief you can claim, simply because you would always receive the maximum possible relief when the payment is made i.e. salary £40,000 less net pay contribution £2,000 = taxable salary £38,000 (the bit that goes on your P60).

But your terminology is odd, in what situation are you going to be paying into a SIPP which isn't a relief at source scheme?

Remember salary sacrifice/smart pension isn't your contribution, you give up some of your salary with these in return for your employer contributing to the pension.

centaurandrew

It's not that odd at all, I have a hargreaves lansdown personal vantage SIPP which I pay into privately.

I automatically get 20% tax relief on payments made but I have to claim the extra 20% for being a higher rate tax payer directly from HMRC.

I'm just trying to work out what happens if my income is only marginally over the higher rate. Am I entitled to claim the full amount, or only the relief on that which I have earned above the threshold.

Dazed_and_confused

That is a relief at source scheme.

Which my original reply addressed.

You can claim the "full amount" of higher rate relief due. But that would be just £0.20 in the example you gave (I'm assuming you mean taxable wages/salary is £1 above the higher rate threshold).

In your second post you said it wasn't a relief at source scheme.

hyubh

centaurandrew wrote: »

I'm just trying to work out what happens if my income is only marginally over the higher rate. Am I entitled to claim the full amount, or only the relief on that which I have earned above the threshold.

If you earn £46,351, do you pay higher rate tax on the full £46,351? No, you pay it on £1. Ergo, if you made a pension contribution of £2,000 from those earnings, you don't get a rebate against the whole £2,000, i.e. for higher rate tax you never paid in the first place.

centaurandrew

Thanks both that's very clear :-)

centaurandrew

Dazed_and_confused wrote: »

That is a relief at source scheme.

Which my original reply addressed.

You can claim the "full amount" of higher rate relief due. But that would be just £0.20 in the example you gave (I'm assuming you mean taxable wages/salary is £1 above the higher rate threshold).

In your second post you said it wasn't a relief at source scheme.

Yes apologies just all of your examples were referring to employer pensions and my earnings being reduced. As this isn't salary sacrifice, I hadn't thought that my earnings amount would be reduced on my P60.

Dazed_and_confused

Relief at source contribution won't affect your taxable income at all so no impact on your P60.

They simply increase the amount of basic rate tax you can pay.