Help to understand Pension Tax Relief

Dazed_and_C0nfused

So based on the current 5% contribution I will always end up paying the 4% upfront, while my pension provider claims the last % for me via tax relief. Then if I want to claim the higher tax payer relief as well, I have to do that after the fact? If this is correct, do I get the 1% claimed on a monthly basis or at the end of the tax year?

Will this be exactly the same if I contribute the full 15% that I plan to contribute? I will end up contributing 14%. Pension provider claims 1% tax relief and I have to claim 1% back as higher tax relief as well?

I think you are making things much more complicated than they really are.

You need to differentiate between the % you wish to contribute and the tax relief.

Tax relief (when it is relief at source) is based on your contribution, not a %.

So if you contribute £120 the pension company adds basic rate tax relief giving you £150 in your pension fund.

If you contribute £1,200 the pension company adds basic rate tax relief giving you £1,500 in your pension fund.

The gross contribution (inclusive of the basic rate tax relief the pension company adds) increases your basic rate tax band so you can more tax at 20% and less at 40%.

Say you contribute £5,000 (gross) then your basic rate band will increase from £37,500 to £42,500.  If you earn enough that will mean you pay 20% tax on an extra £5,000 instead of paying 40% tax.  Saving you £1,000 in tax (£5,000 x 20%).  This tax saving benefits you, it does not get added to your pension fund.

HMRC only ever allow tax relief on pension contributions for the tax year the contribution is paid in.  You have two choices, you can either update HMRC now and get a new (higher) tax code provisionally allowing you extra tax relief but this would be reviewed when the tax year ends, or you can wait until the tax year ends and claim the additional tax relief once you have your P60 and P11D.

If you wait until the tax year ends then HMRC will send you a calculation showing any tax overpaid and invite you to transfer the tax overpaid into your bank account.

I suspect you would find this option easier to understand but it means you get the tax benefit a few months later than getting it through your tax code.

HMRC will usually update the tax code of the next year on the basis you are going to make similar pension contributions in the next tax year. This is never to allow tax relief for a different tax year.  For example if your 2021:22 tax code is amended to include pension tax relief it is an estimate for that tax year, it would never be to allow pension tax relief for 2020:21.

FreshlyCutFlowers

Dazed_and_C0nfused said: [..snip..]

Thanks again and apologies for the delayed response. I believe I understand the contributions explanations, thank you!

Hopefully my last question: I've never paid much attention to my P60 before but are you suggesting it is fine to wait until the tax year ends in march and then let HMRC know that I want to claim back for the higher tax pay? I don't believe I've ever seen a 'tax overpaid' letter before, probably because I never overpaid? Should I not be worried that they don't send it out / don't know I overpaid tax and therefore don't invite me to ask for it back?

In your last comment, it sounds like I cannot retroactively ask for tax relief so if something went wrong in march, that's too late to act on? If that is true, is it not safer to do it upfront?

Dazed_and_C0nfused

If you have never overpaid tax HMRC couldn't send you an overpayment calculation. 
Some people get them automatically i.e. leave a job part way through the tax year and don't proactively claim a refund so HMRC tell them about it when they review that tax year.  With pension contributions you need to tell HMRC.

You have until 5 April 2025 to make a claim for the current tax year.

HMRC only ever allow tax relief on pension contributions for the tax year the contribution is paid in.  Some people are under the impression you can contribute now and get tax relief based on your tax position in a different tax year.  You can't.  The tax relief is only ever calculated with reference to the tax year you make the contribution in.