Maximising higher rate tax relief - help please :)

lco199

Hi all,

Would very much appreciate if anyone could please double check my understanding of pension tax relief. Aim is to try and make a SIPP contribution that will effectively eliminate all higher rate tax payable in year - as an example assume:

1) Gross salary = £52,500
2) Annual bonus = 8.5%
3) Civil service alpha pension contribution = payment of 7.45% of gross income deducted from salary (and any bonus) per annum (this is a DB scheme).
4) Assume current tax year 2018/19 for tax band calculations
5) Assume no other passive income and no other pension contributions made (yet) in year

As I understand it this means:

5) Gross income for calculating tax = £56,962.50
6) Civil service pension deductions = £4,243.71
7) Taxable income therefore = £40,867.79
8) Of which £34,499 would attract tax at 20%
9) And of which £6,368.79 would attract tax at 40%

So, questions:

10) How do I work out the maximum that I could contribute to a SIPP that is all eligible for 40% tax relief?
11) Is it as simple as paying (9) £6,368.79 / 1.25 net into a SIPP i.e £5,095.03 and requesting a payment of £1,273.76 from HMRC?
12) Additionally - would I need to wait until the following tax year to claim any refund?

Is it more complicated than this?

Many thanks

Dazed_and_confused

Pension tax relief doesnt quite work like that.

HMRC do not pay an extra 20%. The gross pension contribution will increase the amount of basic rate tax you can pay, reducing any higher rate tax payable. This can mean you overpay tax of about 20% but it isn't usually quite as simple as that.

Also,

5) Gross income for calculating tax = £56,962.50

What tax is calculated on this figure?

Why is your basic rate limit only £34,499?

Where you are resident for tax purposes?

lco199

Thanks for the reply.

5) £56,962.50 would be the gross salary of £52,500 + bonus of 8.5%

"What tax is calculated on this figure?"

I believe £6,900 tax @ basic rate and £2,547.52 @ higher rate. My civil service pension contributions (of 7.45% of gross salary + bonus) reduce the £57k to £53k and then deduct the personal allowance of £12k = £41k of taxable income - £35k @ 20% and £6k @ 40%?)

"Why is your basic rate limit only £34,499?"

This is the entire basic rate tax band? i.e £46,350 less £11,850 personal allowance?

UK tax resident

Dazed_and_confused

So do you mean no tax is actually calculated on £56,962.50?

I'm just struggling to see what relevance this has, other than making things a bit more complicated. Tax is based on your taxable income, in a "net pay" pension scheme this is after the pension contributions to your company scheme.

You seem to be working things out in a totally different way.

£46,350 less £11,850 is £34,500.

lco199

Apologies if this has caused unnecessary confusion. To try and clarify - £57k is gross salary and bonus before taxation.

(7) above is 'taxable income' after pension contributions = £40,867.79

I was disclosing full information in case there was something missing in my calculations.

Dazed_and_confused

If you are going to pay higher rate tax on £6,368 the a gross SIPP contribution of £6,368 will increase your basic rate tax band by £6,368 so no higher rate tax would be payable.

You would pay the pension company £5,095 and they add £1273.75 basic rate tax relief.

You then notify HMRC of the gross contribution (making it clear it is £6,368 gross not £6,368 plus basic rate relief) and they will review your tax position for 2018:19 and refund you any tax overpaid.

They may also assume you will make a similar payment in 2019:20 and adjust your tax code to reflect this (they never give pension tax relief for one year in the tax code of another year) so you might want to provide a more accurate estimate when you contact them - to avoid the potential for owing tax back for 2019:20.

In theory the tax refund for 2018:19 could be c£1,272 but any other taxable income you have such as savings interest, could affect this.

lco199

Thanks - sounds like you are in agreement with my calculations (as per 11) then. That is reassuring.

hugheskevi

3) Civil service alpha pension contribution = payment of 7.45% of gross income deducted from salary (and any bonus) per annum (this is a DB scheme).

The alpha pension contribution rate is 7.35% and are you certain the bonus payment is pensionable? Bonuses are not usually pensionable, but can be.

lco199

Thanks, hugheskevi. I was going off memory there with the pension rate. I think you are correct with 7.35%.

I am fairly certain that bonuses have been pensionable in the past, but could be wrong - certainly will double check this as that would make a difference.

Dazed_and_confused

Thanks - sounds like you are in agreement with my calculations (as per 11) then. That is reassuring.

Whether you will be liable to higher rate tax on £6,368 in the first place is another matter.

Your February payslip should show your taxable pay to month 11 of the tax year. And presumably you can work out roughly what your taxable pay for March (month 12) will be so that should be an accurate as possible reflection of your taxable wages for 2018:19.