Higher rate Pension Tax relief question

3Dwarves

Hello, 

I have recently found out that as hight rate tax payer, I can claim pension tax relif through my self assessment form for the 40% tax I am paying, and I thought it would be great to profit from that allowance and use it, while I can.

I looked at my workplace pension and it seems that my employer is paying pension contributions based on the qualifying income, which is the difference betwee £50,000 minus £6,240, with relief at source. My pension provider then claims the 20% from HMRC. 

My question is, under what circumstances can I profit from the generous additional 20% tax relief as a high rate payer?

I am currently paying 4% pension contributions on the qualifying income and I am not sure if I qualify for the higher tax relief as it is. Should I increase my pension contributions to a certain higher percentage? 
How can I calculate how much potentially that extra tax relief is going to be and how is it going to be pai? Is it going directly to the pension after I claim it through the self assesment or does it go into my income after aelf assement recalculation. 

I looked at lots of exapmples and the pension rules but the more I read the more confusing it becomes. 
I thought I was paying 4% of my gross income into the pension pot, but after comparing various documents and numbers it seems that I am paying based on this "qualifying income", which is less than I was expecting. 

Finally, if I decide to pay into SIPP, I understand both my pension contributions in the year can not be more than 40k for the whole year, ( I am really far from that). How much pension can I pay to claim the higher rate pension tax relief? 

Thanks to anyone who would reply with advice!

[Deleted User]

What is your gross salary? £50000?

Dazed_and_C0nfused

You only get higher rate tax relief on the higher rate tax you have paid.

So if you pay higher rate tax on £100 you could save £20 even if you paid £40k into a "relief at source" pension (you would be paying 20% on the £100 instead of 40%).

Any higher rate tax relief saves you money, it is never added to your pension fund.

If you want to check how it has benefited you in 2020:21 just complete your return without including the pension contributions and note the tax due/overpaid.

Then include the pension contributions and check the calculation again to see the difference.

Albermarle

As an added comment - only adding 4% is a very low figure in any case. To build up a decent pot you probably need to see around 15% going in ( yours and employers contributions ) if you are relatively young , If you are more middle aged and the pot is not that big, then significantly more than that .
If you can get 40% tax relief , contributing as much as possible to a pension is a really good deal for you.
There is a pension forum on MSE where these topics are very regularly discussed.

3Dwarves

Thank you everyone!

I went back to read a bit more and check my figures again. So I have never claimed the extra tax relief it seems and nobody has claimed it on my behalf, so it looks like a wasted opportunity at this point. However, I found out that I can claim it for the past four years, which I am planning to do now. 
It seems that these 4% are the absolute minimum so I'll see if I can increase that number for next year. I am rather towards the middle age now and have quite stupidly abandoned the whole tax and pension arrangements to run themselves. 

When you say 15% into pension, how much is that? Is it only my contribution and then I can have as added the contributions from eployer and HMRC, or all of these altogether to make up 15%?
Also, is the 15% as a number equal to the 15% of the gross pay, or only the qualifyring pay for at source relief, which is much smaller figure? 
I find it a bit confusing. 

Albermarle

It seems that these 4% are the absolute minimum so I'll see if I can increase that number for next year

Normally should be no problem to make higher % contributions or add a lump sum .

Your age is one thing, but it is also important to know how much is actually in your pension today . It might be quite a shock to realise that when you retire you need a pretty large pot to generate a decent income . So for example to generate £20K pa of pension income sustainably , you would need a pot of around half a Million Pounds .

Of course if you had other significant investments and savings , then you would not need to rely on the pension pot so much .Also you will get the State Pension later .

The 15% is only a guess /estimate, some people add 4% , some add 40% ( not many but some )  - the reality is that the more you put in the better. Especially if you earn enough that you will get higher rate tax relief on the contributions.

3Dwarves

Albermarle said:

The 15% is only a guess /estimate, some people add 4% , some add 40% ( not many but some )  - the reality is that the more you put in the better. Especially if you earn enough that you will get higher rate tax relief on the contributions.

Exactly this, I have started looking at the figures recently as I am a high rate tax payer and haven't done enough with my earnings.
I am looking at pension contribution calculators, but they never seem to mention or include the "relief at source" scheme, which is the one my employer's pension fund is using at the moment. I can see that in these calculators, when I put in the 4% I am supposedly paying, it shows me a much bigger amount of contributions than the ones I am actually paying out of my wages every month. I assume this is because of the "relief at source" method.
I want to compare my current contributions with something more effective - like increasing the current contributions or going for salary sacrifice. However, I need to work out exactly how much net pay I am going to receive as there is a minimum under which I can't afford to live on.

Albermarle

I want to compare my current contributions with something more effective - like increasing the current contributions or going for salary sacrifice.

Firstly your employer has to operate a salary sacrifice scheme , you can not do it on your own .

The tax relief benefit is the same  as relief at source. The difference is that you get the higher rate relief automatically ( as you never pay it in the first place ) and all the relief goes into the pension . With relief at source you have to claim the higher rate relief and it comes back to you personally, not to the pension .

With salary sacrifice you gain by not paying NI on pension contributions - but this is only 2% for a higher earner .

Just reading your previous posts and this seems a bit odd.

I looked at my workplace pension and it seems that my employer is paying pension contributions based on the qualifying income, which is the difference betwee £50,000 minus £6,240, with relief at source.

It looks like your employer is sticking rigidly to the legal minimum for an  auto enrolment pension . By paying the minimum % ( 3%?) and only on the qualifying earnings . As far as I know this is quite unusual for higher paid /middle management /professional employees. Normally the % contribution would be based on the full salary, and higher than 3% ( but not always) . Also the employee % contributions would be on the full salary, not just part of it. It seems you have a rather stingy employer, in this respect at least.

Probably better in future if you have more questions along this pension/tax relief subject that you post a new thread /question in the pensions forum . You will get more people answering/proffering an opinion.

Dazed_and_C0nfused

I am looking at pension contribution calculators, but they never seem to mention or include the "relief at source" scheme, which is the one my employer's pension fund is using at the moment. I can see that in these calculators, when I put in the 4% I am supposedly paying, it shows me a much bigger amount of contributions than the ones I am actually paying out of my wages every month. I assume this is because of the "relief at source" method.

I suspect that relief at source is the most common method of contributing.

Public sector schemes, which tend to be DB pensions, seem to use "net pay" and the majority of private sector use relief at source or, if you're lucky, salary sacrifice.

I have recently found out that as hight rate tax payer, I can claim pension tax relif through my self assessment form for the 40% tax I am paying

Have you completed Self Assessment returns for the years 2017:18, 2018:19?  If so you are too late to amend these now so will have to make a claim for overpayment relief.

3Dwarves

Oh, actually I can change the 2019/20 tax retun now? I've checked on the HMRC website, apparently up to the end of this month. Thanks so much, Dazed_and_C0nfused, I'll try that. Would I have to do that before filing thi year's tax return? I'd imagine there will be a change in the section askiing for overpaid/underpaid tax from previous years, in the current year's tax retun after I make the amendment?

How do I make the overpaytment relief for the previous years 2017/18, 2018/19 though? Is it still done through the self assessment? I checked the current tax return for 2020/21 and I couldn't find any prompt for claiming tax relief for previous years, only for the current one. Planning to call HMRC tomorrow but would appreciate any additional help.

Thank you!

[Deleted User]

Have a read of this - a good bit down under ‘Write to HMRC’

https://www.gov.uk/self-assessment-tax-returns/corrections