40% Tax Relief

boltonian

As a teacher in the independent sector, my pension has moved from TPS to a new scheme from Aviva. This is more flexible and we can choose how much we pay in direct from our salary. I was on the understanding that, as a higher rate tax payer, I get 40% tax relief on this. I assumed that this is taken at source i.e. If I choose to pay £100 extra into py pot, I only lose £60 from my salary. However, I am seeing lots of articles that suggest this will be taken at 20% with the extra 20% having to be reclaimed from my annual self assessment. Can anyone confirm? And if this is the case, how do you get the 'extra' back?

Dazed_and_C0nfused

First thing is you need to understand what type of pension contributions you are making.

The three normal methods (the third being fairly uncommon for most people) are

Net pay i.e. salary is £40k and you contribute 10% into the pension so your taxable pay (the amount on your P60) is only £36k

Relief at source i.e. the contribution is paid net of tax relief and the pension company adds the 25% uplift i.e. you contribute £300 and they add £75 tax relief

Gross contribution with no tax relief whatsoever.  This is often used for public sector schemes where a large one off contribution is paid for example to purchase extra pension over and above the standard amount being accrued.

There is also salary sacrifice but you don't contribute anything with that, your employer does and therefore there is no pension tax relief due on those contributions.

Until you know the type everything else is irrelevant.

hugheskevi

Your contributions will be taken in 1 of 3 possible ways:

(1) Relief at source - money deducted from post-tax income and sent to pension provider who adds basic rate relief. You claim higher rate relief from HMRC.

(2) Net pay - money deducted from pre-tax income and sent to provider. Full relief received without you needing to do anything.

(3) Salary sacrifice - salary is reduced in return for pension contribution, so you receive the full benefit of relief without needing to do anything.

Your employer can confirm which method is used.

JoeCrystal

boltonian said:

As a teacher in the independent sector, my pension has moved from TPS to a new scheme from Aviva. This is more flexible and we can choose how much we pay in direct from our salary. I was on the understanding that, as a higher rate tax payer, I get 40% tax relief on this. I assumed that this is taken at source i.e. If I choose to pay £100 extra into py pot, I only lose £60 from my salary. However, I am seeing lots of articles that suggest this will be taken at 20% with the extra 20% having to be reclaimed from my annual self assessment. Can anyone confirm? And if this is the case, how do you get the 'extra' back?

It may be more flexible but a lot less valuable. How much is your Employer contributing to your new pension scheme? Hopefully, it would be much higher than average, like 20% or higher.

Albermarle

If you can see your pension on line, check the contributions and see if tax relief is added . If it is then you are contributing via 'relief at source ' as explained in previous posts . In this case you will have to reclaim any higher rate tax relief separately.

boltonian

hugheskevi said:

Your contributions will be taken in 1 of 3 possible ways:

(1) Relief at source - money deducted from post-tax income and sent to pension provider who adds basic rate relief. You claim higher rate relief from HMRC.

(2) Net pay - money deducted from pre-tax income and sent to provider. Full relief received without you needing to do anything.

(3) Salary sacrifice - salary is reduced in return for pension contribution, so you receive the full benefit of relief without needing to do anything.

Your employer can confirm which method is used.

Thanks all, pretty sure it is option 2. Makes sense.

boltonian

JoeCrystal said:

It may be more flexible but a lot less valuable. How much is your Employer contributing to your new pension scheme? Hopefully, it would be much higher than average, like 20% or higher.

It is only less valuable if you intend to work until 67 and live until 100. The fact that I can retire at 58 and draw this without penalty and without touching my TPS until 60/67 means I can have a much higher income from 58-75. After that I will need far less income so can live on my TPS and State pension. Much rather have the flexibility to enjoy a higher income while I am still young enough to travel etc. 

Dazed_and_C0nfused

boltonian said:

hugheskevi said:

Your contributions will be taken in 1 of 3 possible ways:

(1) Relief at source - money deducted from post-tax income and sent to pension provider who adds basic rate relief. You claim higher rate relief from HMRC.

(2) Net pay - money deducted from pre-tax income and sent to provider. Full relief received without you needing to do anything.

(3) Salary sacrifice - salary is reduced in return for pension contribution, so you receive the full benefit of relief without needing to do anything.

Your employer can confirm which method is used.

Thanks all, pretty sure it is option 2. Makes sense.

Whatever your circumstances that always guarantees the maximum possible tax relief without ever having to contact HMRC or even mention pension contributions to them.

Albermarle

Dazed_and_C0nfused said:

boltonian said:

hugheskevi said:

Your contributions will be taken in 1 of 3 possible ways:

(1) Relief at source - money deducted from post-tax income and sent to pension provider who adds basic rate relief. You claim higher rate relief from HMRC.

(2) Net pay - money deducted from pre-tax income and sent to provider. Full relief received without you needing to do anything.

(3) Salary sacrifice - salary is reduced in return for pension contribution, so you receive the full benefit of relief without needing to do anything.

Your employer can confirm which method is used.

Thanks all, pretty sure it is option 2. Makes sense.

Whatever your circumstances that always guarantees the maximum possible tax relief without ever having to contact HMRC or even mention pension contributions to them.

Plus it means the Higher rate relief is effectively going straight into the pension. If you have to claim it back and/or get a different tax code , it is more likely it just gets spent .

boltonian

Dazed_and_C0nfused said:

Whatever your circumstances that always guarantees the maximum possible tax relief without ever having to contact HMRC or even mention pension contributions to them.

Do you get 40% on all your contributions, or only those until your pay drops below 50k?
I.e I I earned 60k a year and made £15k in pension payments, would I get 40% relief on the whole lot, or only the first 10k?

hugheskevi

Do you get 40% on all your contributions, or only those until your pay drops below 50k?

I.e I I earned 60k a year and made £15k in pension payments, would I get 40% relief on the whole lot, or only the first 10k?

Only on contributions which are subject to higher rate tax. Assuming you have a standard Personal Allowance, that will be income over £50,000.

So in the example, you would only get 40% relief on first £10K.

Whatever your circumstances that [Net pay] always guarantees the maximum possible tax relief without ever having to contact HMRC or even mention pension contributions to them.

Not relevant to the OP, but worth noting that relief-at-source results in higher tax relief for those with taxable income below their Personal Allowance.