Extra payment into pension

bjorn_toby_wilde

Good afternoon all

I'm looking at making an extra payment into my workplace DC pension before the end of the tax year.

Aviva, who run the scheme, advised that I could notify them and make the payment (£20K) then they would reclaim basic rate income tax from HMRC.  I would then complete a tax return and the remainder of the tax (I'm a higher rate taxpayer) would be returned via my tax code.

Whilst this sounds good, I'd rather all the tax went into the pension.  Is there a way I can make this happen?

Dazed_and_C0nfused

bjorn_toby_wilde said:

Good afternoon all

I'm looking at making an extra payment into my workplace DC pension before the end of the tax year.

Aviva, who run the scheme, advised that I could notify them and make the payment (£20K) then they would reclaim basic rate income tax from HMRC.  I would then complete a tax return and the remainder of the tax (I'm a higher rate taxpayer) would be returned via my tax code.

Whilst this sounds good, I'd rather all the tax went into the pension.  Is there a way I can make this happen?

You cannot achieve either option now.

The basic rate tax relief will be added to the pension fund by Aviva.

You will need to notify HMRC of the gross contribution (£25k) and this increases the amount of your basic rate tax band meaning more tax is paid at 20/21% and as a result less can be paid at 40/41%.

It is too late now to get any extra tax relief due through your tax code, HMRC will review your tax position in the summer and send you a refund for any tax overpaid.  This calculation will look at your overall tax position for the year so any refund will be net of any tax you owe HMRC for any other reason or include any additional refund due.

You can of course use any personal tax refund to make a further contribution in 2020:21 (subject to applicable contribution limits etc).

HMRC never allow tax relief in respect of pension contributions in the tax code of a different tax year to the one you make the contribution in.  They may however update your 2020:21 tax code on the basis that you will make a similar contribution again in that tax year so you should give them an estimate of what you expect to contribute to a relief at source scheme in 2020:21 so you don't end up with an unexpected bill for 2020:21 at a later date.

NB.  The above assumes you don't need to complete a Self Assessment return.  If you do need to complete a Self Assessment return for some reason then it is upto you to include the contribution on your return and the Self Assessment calculation takes into account the increased basic rate tax band.

kinger101

I'm guessing you're not in a salary sacrifice scheme, in which case, there'd be a more tax-efficient way of getting this into your pension, albeit next year.

It sounds like you're making a £20K net payment into the pension, in which case, Aviva will claim another £5K from HMRC topping it up to £25K.  You'll then getting £5K refunded from HMRC (assuming you've paid higher rate tax on this amount).

If you really wanted to stick the whole £20K in this year, you'd have to make a cash payment of £26,667 this year, which would be grossed up to £33,333 once Aviva claims the 20% BR.  You'd then get £6,667 back if you've paid HR tax on this. 

Albermarle

What Aviva says is not exactly correct on what usually happens . If you make a lump sum payment as a higher rate taxpayer then you need to inform HMRC but it is not always necessary to fill in a tax return just for this issue. They will change your tax calculation accordingly and you will pay more 20% tax and less 40% tax - this should mean you will be due a rebate /refund as you will have paid more tax than necessary during the year. This would normally be sent to you by bank transfer/cheque.. If you wish you could then add this to your pension. However HMRC will automatically then adjust your tax code for the following tax year on the assumption you will make the same lump sum payment. So the following year if you make the same lump sum payment , there will be no refund as you will have paid less tax during the year. If you do not make a lump sum payment then you will owe them money unless you change your tax code via your personal tax account.
As a separate point you can not get more higher rate tax relief than you have paid higher rate tax ( an obvious point maybe but some people assume that just because they are in the HRT bracket they can claim what they like ) .

bjorn_toby_wilde

Thanks all.

Once again, great advice.  I hadn't realised I would get a repayment rather than an adjustment in my tax code next year.

I am in a salary sacrifice scheme, so you're right that I could have done it more efficiently, but not this late in the year.

Thanks also for letting me know about informing HMRC. If I can avoid a tax return then so much the better!

Albermarle

Once again, great advice.  I hadn't realised I would get a repayment rather than an adjustment in my tax code next year.

Just to repeat this seems to be what normally happens , but can not be 100% sure that is what will happen in every case.