Higher Rate Tax Relief

Triumph13

VDOT47 wrote: »

Either way, the additional tax relief appears to come back to you as money in your pocket, rather than actually in your pension? Is this a correct interpretation?


I suppose that means you can then pay it straight into your pension as soon as your receive it, so it gets in there eventually but a year later than the basic rate tax relief does.


With salary sacrifice does the whole 40% relief go into the pension at the start (thus earning an extra year's growth)?


Thanks!

I think what you are missing is that to get £100 into the pension when the contribution is from your net pay you don't pay in £60 then try to get the tax in the pension too. You pay in £80, HMRC adds £20 and you reclaim another £20 in cash (or via tax code) from HMRC yourself to bring your net contribution back down to £60.

VDOT47

Thanks everyone for your comments.


So taking the tax return route, it is technically a bit disingenuous for these pension companies to say "40% tax relief" and imply that this means the extra 40% ends up in your pension pot? Only 20% does and the rest you have to then decide what to do with.


My interpretation is that, if it is on offer, salary sacrifice is the better option but I am not entirely clear?

VDOT47

Triumph - thanks. My point is, I don't want the extra £20 back, I want it in my pension pot!

Triumph13

VDOT47 wrote: »

Thanks everyone for your comments.


So taking the tax return route, it is technically a bit disingenuous for these pension companies to say "40% tax relief" and imply that this means the extra 40% ends up in your pension pot? Only 20% does and the rest you have to then decide what to do with.


My interpretation is that, if it is on offer, salary sacrifice is the better option but I am not entirely clear?

No, the whole 40% ends up in the pension pot. You just have to 'lend' 20% until you reclaim it from HMRC.
Sal Sac always wins unless you are below the tax threshold.

MallyGirl

sal sac is good and simple but you cannot sal sac below minimum wage and it might affect benefits like life assurance (e.g. 4 x salary but which salary do they use) and bonuses depending on how stingy your employer is

Triumph13

VDOT47 wrote: »

Triumph - thanks. My point is, I don't want the extra £20 back, I want it in my pension pot!

You want to put £100 in your pension. You want it to cost you £60. This is how it works:

1. Contribute £80. Pension £80, cost £80
2. Scheme claims relief. Pension now £100, cost still £80
3. You claim relief. Pension still £100, cost now £60.

Simples.

VDOT47

Thanks - I seem to have a massive blind spot when it comes to understanding how pensions work! Which is annoying, as I like to 100% understand everything I am doing financially, so that I can plan as best as possible for the future.


I think I was looking at it from the wrong end ie. the extra tax relief would boost what is in the pot, rather than that the same amount goes into the pot but the tax relief comes back to me.

Triumph13

VDOT47 wrote: »

Thanks - I seem to have a massive blind spot when it comes to understanding how pensions work! Which is annoying, as I like to 100% understand everything I am doing financially, so that I can plan as best as possible for the future.


I think I was looking at it from the wrong end ie. the extra tax relief would boost what is in the pot, rather than that the same amount goes into the pot but the tax relief comes back to me.

Don't worry, you are not alone in struggling with this one. The prize goes to the lady a few years ago who, before asking for help on here, had paid her contribution, got a cheque from HMRC for tax relief, paid that into the pension, got another cheque from HMRC, paid that into the pension, got another cheque and was worried that she was trapped in a never-ending cycle of smaller and smaller tax refunds...

Funkyfreddy

Triumph13 wrote: »

You want to put £100 in your pension. You want it to cost you £60. This is how it works:

1. Contribute £80. Pension £80, cost £80
2. Scheme claims relief. Pension now £100, cost still £80
3. You claim relief. Pension still £100, cost now £60.

Simples.

..and if you want a £100 contribution into employer scheme where contributions are deducted from your pay before the calculation of income tax you make you make a £100 contribution.

Your taxable pay is reduced and income tax was never paid on that contribution.

Your total taxable pay for the year will be reflected as such on your P60 and
no additional relief is (or can) be claimed.

VDOT47

To revive this thread for one further question - I now have the ability to pay an extra £500 pcm into a pension.

If I increase my contribution to the workplace pension it will work as discussed above. If I set up a separate private pension, presumably I make separate payment of £500 each month from my net salary received (so, already taxed) and wait until the end of the tax year to do a return and get all the available tax relief as a rebate? How long does it normally take to receive the rebate once the tax return has been submitted?

Thanks!