Pension - Under Recovery of Tax

arcam_man

Hi Dazed and confused,

I'm sorry but you are totally wrong here. The personal tax allowance can increase significantly due to many things, including the recovery of tax. Other things that can affect it are any tax deductible items such as work clothes, membership of professional bodies etc. I can assure you that my allowance has increased significantly due to the pension. Also when I invested a large sum in a pension a couple of years ago I recovered a portion directly from the HMRC and the remainder through my tax code, This is standard practice - you can phone HMRC to confirm.

arcam_man

Dazed and Confused,

I'm sorry but you are totally wrong on this as well. Look at the calculations - the £300 is not the gross contribution.

NordicNoir

arcam_man wrote: »

Thanks Linton,

I totally agree with your comments regarding starting with gross. However I believe the gross contribution is not £300 - as I'm a higher rate tax payer the gross is actually £400 (£240 net plus £160 tax). If the £240 x 1,25 figure is used it merely brings it back to what a basic rate tax payer gross would be, and it will be impossible to recover the £160 tax. This is exactly where I believe the problem lies,

The gross contribution is the amount that actually ends up in your pension i.e. £300 (being your net contribution of £240 and the basic rate added by HMRC of £60).

The remaining £60 (if your whole contribution qualifies for the full 40% relief) comes back to you as a reduction in your tax bill, provided that you have stated that the gross contribution was £300 on your tax return. This is done by extending your basic rate band by £300 as mentioned previously. This results in £300 of your income being taxed at 20%, rather than 40%, hence saving you another £60.

If you have stated on your tax return that your gross amount was £400, you have overclaimed your contribution and need to get it corrected as you will have been given too much tax relief.

jem16

arcam_man wrote: »

Dazed and Confused,

I'm sorry but you are totally wrong on this as well. Look at the calculations - the £300 is not the gross contribution.

Both Linton and Dazed and Confused are correct. It is you that is wrong.

The gross amount for tax relief purposes is what is actually paid into your pension scheme. That is £300 made up of a net contribution of £240 plus basic rate tax relief of £60.

It's as simple as that and it's why you are not getting what you think is the correct tax relief.

Linton

arcam_man wrote: »

Dear Linton,

Sorry - I don't seem to be getting this point through. £300 is 5% of the gross salary therefore it hasn't been taxed and is actually not really relevant here. The net (after tax) deduction from salary in the way carried out is £240. Therefore this actually equates to a deduction from the gross salary of £400. In line with my calculations this is what the 20% tax contribution to the pension should be based upon - not £300.

Here is your basic mistake - not all the £400 goes into your pension. Only £300 of the £400 goes into your pension. The remaining £100 of the £400 goes back to you minus 40% tax. As I said, you cannot expect tax relief on money that goes to you.

Dazed_and_confused

Hi Dazed and confused,

I'm sorry but you are totally wrong here. The personal tax allowance can increase significantly due to many things, including the recovery of tax. Other things that can affect it are any tax deductible items such as work clothes, membership of professional bodies etc. I can assure you that my allowance has increased significantly due to the pension. Also when I invested a large sum in a pension a couple of years ago I recovered a portion directly from the HMRC and the remainder through my tax code, This is standard practice - you can phone HMRC to confirm.

I'm clearly not going to persuade you otherwise but I can assure you that you are getting terribly mixed up between your Personal Allowance and your tax code allowances (or deductions with reference to the recovery of tax you mentioned).

HMRC never ever give pension tax relief for one tax year through a change to the tax code of a different year. You might believe that happens but it doesn't. HMRC will include pension tax relief in a tax code for the pension contributions they expect you to make in that tax year.

If you look back at your Self Assessment calculations I'm sure you will find that your basic rate band has been increased by the amount of gross pension contribution you declared on your return each year. If HMRC allowing tax relief through the next year's tax code as well then you would be getting two lots of tax relief. Which you aren't.

Dazed_and_confused

Maybe this will help, particularly in understanding £300 is the gross contribution.

https://www.litrg.org.uk/latest-news/news/181214-do-you-understand-how-tax-relief-your-pension-contributions-works#reliefatsource

xylophone

See https://www.aegon.co.uk/support/faq/pension-technical/claiming-tax-relief-pp-faq.html

arcam_man

I've been racking my brains on this issue last night and I now understand where I've been making a mistake. I've been looking at recovering all the tax on what has been paid, but in fact I should offset the contribution by the higher rate recovery I get back from HMRC (rather than this being additive).

In my example of contributions:

1. Net contribution £240

2. RL recover the 20% - £300

3. HMRC give back £60

4. Effectively this means paying a net £180 as the pension contribution

£180 as a net results in a gross of £300 and an effective payment of 5%.

My calculations appeared to make sense, but I needed to turn it round on it's head and see the HMRC recovery an offset, and as soon as I saw the £180 I realised the problem.

The good news is I now understand this mechanism. The bad news is that there is no further tax to recover.