High income child benefit charge and pension

noodlefarmer

I live in Scotland and last week I received a generic letter from HMRC stating that I may owe them money from child benefit payments since 2012/13. I’ve worked for three employees since then and over that period my salary has ranged from £45k to £56k. My wife earns less than 25K.

Over this period I’ve consistently made standard pre-tax company pension contribution at around 5% of salary however I’ve also had a SIPP for the duration into which I’ve paid £4500 a year / £375 a month before being ‘grossed up’.

I was aware of the 2013 change to the threshold and so I increased my pension contributions before then based on advice from my then financial advisor. Based on the HMRC online calculator (salary minus pension payments before tax and also pension payments after tax) the result states that I owe them nothing as my adjusted net income was below the threshold - however I spoke to HMRC tonight and the advisor seemed uncertain about whether I owe any repayments as ‘the type of pension matters’.

Can anyone offer any clarity (assuming my explanation makes any sense)? Thanks.

Dazed_and_confused

This is an area which causes plenty of confusion. In part as there are three very common but completely different methods of contributing to a pension.

Over this period I’ve consistently made standard pre-tax company pension contribution at around 5% of salary

Was the 5% through a net pay arrangement or salary sacrifice?

I’ve also had a SIPP for the duration into which I’ve paid £4500 a year / £375 a month before being ‘grossed up’.

Have you ever informed HMRC about the SIPP contributions?

noodlefarmer

Thank you for the reply. In each case for the company pension schemes were a “defined contribution workplace pension”. Deductions were taken before I was paid (sorry if that’s vague - I can’t check my paperwork at the moment).

As far as the SIPP goes I’m not sure if they do know - the IFA who set it up ten years ago didn’t mention having to do so, although he did perform the actual setup.

Dazed_and_confused

That could be either net pay or salary sacrifice, the key differences being with net pay you pay the contribution and it reduces your taxable income. For example salary £60,000 less 5% net pay pension contribution = taxable pay of £57,000.

Salary sacrifice is where you don't contribute to the pension but agree to a salary reduction in exchange for your employer contributing to the pension. This reduces your salary for both tax and National Insurance purposes.

Either way you cannot deduct these when calculating your adjusted net income as they are already reflected in your (lower) P60 pay figure. Deducting them again would mean you have double counted them.

A SIPP contribution would usually be paid under the relief at source rules. So if you paid £4,000 the pension company, courtesy of HMRC, add 25% to give you £5,000 in your pension fund.

The gross SIPP contribution doesn't reduce your taxable income but it does reduce your adjusted net income.

For income tax purposes the gross contribution increases the amount of basic rate tax you can pay. Which in turn reduces the amount of higher rate tax payable.

If you haven't told HMRC then it sounds like you may have missed out on several years of higher rate tax relief.

If you have got your adjusted net income figures right and don't owe any High Income Child Benefit Charge then it may be you are actually due a refund.

You need to look at the figures for each tax year separately however be prepared for HMRC to resist any claim for higher rate tax relief for the years before 2015:16 as that would normally be out of time for such a claim to be made now.

noodlefarmer

That actually makes much more sense now. Thanks for taking the time to reply!