Confused about personal pension relief

waveyjane

I'm on PAYE and only have one employment which I've had since April 2020. I've got a defined contribution workplace pension that I contribute to, I also have a SIPP that I usually put my annual bonus in. I'm a higher rate tax payer so I claim additional relief on those SIPP payments.

Normally, my tax code gets adjusted upward by the amount of the relief. This year though my tax code was adjusted in the opposite direction - by a lot! As if I had been on the wrong tax code previously. So I rang HMRC to ask why and they said it "Because you told us that your personal pension relief had changed". This, they said, had led to me having to pay more tax.

I don't understand what this means though. I thought that if my income stayed the same and I made a contribution to my SIPP, I'd get tax back, not have to pay more.

Help!  :'(

[Deleted User]

Was the bonus that you paid into your SIPP less one year than in a previous year? What is the breakdown of the tax code?

waveyjane

The amount I paid into the SIPP in the last tax year was about half what I paid in the year before that, yes. On the notice of coding it says:

Personal allowance: £12,570 I understand that
Personal pension relief: £6,250 - but the amount I paid into my SIPP that year was £10,000?
Less medical insurance: £524 I understand that
Less Adjustment for estimated tax you owe (this year): £6,939

Dazed_and_C0nfused

The personal pension relief adjustment won't necessarily reflect the amount you paid.

For example say it was a straightforward situation where you paid £10,000 (gross) and we're due higher rate relief on the whole £10,000.  That means you need to get £2,000 so if you are a higher rate payer on your PAYE income the adjustment would be £5,000.

By increasing your tax code allowances by £5,000 this means you will pay £2,000 less tax on PAYE (£5,000 x 40% = £2,000).

One thing I would recommend is you need to be crystal clear about the amount you contributed so always refer to the gross contribution, not what you actually paid.

So if you paid £10,000 I presume what you really mean is that it was a gross contribution of £12,500.

And a tax code adjustment of £6,250 would be normal for a gross contribution of £12,500.

It seems to me the issue here is that you were provisionally receiving relief on a higher amount and now it has been revised to the reflect the latest information available i.e. you contributed £12,500 in 2021:22 so that amount has been used when calculating your latest 2022:23 tax code.

This doesn't mean the previous tax code was "wrong", it's just that it has now been adjusted for the latest information. 

How much do you expect to contribute (gross) in 2022:23?

[Deleted User]

Dazed_and_C0nfused said:

The personal pension relief adjustment won't necessarily reflect the amount you paid.

For example say it was a straightforward situation where you paid £10,000 (gross) and we're due higher rate relief on the whole £10,000.  That means you need to get £2,000 so if you are a higher rate payer on your PAYE income the adjustment would be £5,000.

By increasing your tax code allowances by £5,000 this means you will pay £2,000 less tax on PAYE (£5,000 x 40% = £2,000).

One thing I would recommend is you need to be crystal clear about the amount you contributed so always refer to the gross contribution, not what you actually paid.

So if you paid £10,000 I presume what you really mean is that it was a gross contribution of £12,500.

And a tax code adjustment of £6,250 would be normal for a gross contribution of £12,500.

It seems to me the issue here is that you were provisionally receiving relief on a higher amount and now it has been revised to the reflect the latest information available i.e. you contributed £12,500 in 2021:22 so that amount has been used when calculating your latest 2022:23 tax code.

This doesn't mean the previous tax code was "wrong", it's just that it has now been adjusted for the latest information. 

How much do you expect to contribute (gross) in 2022:23?

Excellent explanation - particularly at 5.52 am!

waveyjane

How much do you expect to contribute (gross) in 2022:23?

Not sure - maybe about the same as I did last year.

But thanks for the explanation. I guess I don't really know why I was receiving relief on a higher amount before, but at least if it seems sane to you then I guess it's OK!   

Lorian

The clue why will be on the notice of coding you should have got/get in the post.
Did you do a tax return?

waveyjane

Lorian said:

The clue why will be on the notice of coding you should have got/get in the post.
Did you do a tax return?

The breakdown is in my message above from the notice of coding. I claimed the pension rebate by submitting a self-assessment form, yes.  When you say "the clue" do you mean why I was on a higher code before?

waveyjane

While I'm getting the impression that my tax calculation is probably correct, I'm not quite able to get my head around this concept of how the relief amount works though.

So I understand that the amount you contribute to your pension in a year gets used with other things to determine your tax code. And that the rebate you get is given to you by an increase in that code. 

However, your "personal pension relief" amount will continue to be in force in subsequent years until you make another contribution? Is that right?

So, if you contributed £10,000 in year 1 then £0 in year 2, but then £1,000 in year 3, your code in year 3 might decrease even though you got the rebate from the £1,000.

And something like that happened to me?

Dazed_and_C0nfused

waveyjane said:

While I'm getting the impression that my tax calculation is probably correct, I'm not quite able to get my head around this concept of how the relief amount works though.

So I understand that the amount you contribute to your pension in a year gets used with other things to determine your tax code. And that the rebate you get is given to you by an increase in that code. 

However, your "personal pension relief" amount will continue to be in force in subsequent years until you make another contribution? Is that right?

So, if you contributed £10,000 in year 1 then £0 in year 2, but then £1,000 in year 3, your code in year 3 might decrease even though you got the rebate from the £1,000.

And something like that happened to me?

You can get some provisional tax relief via your tax code but (in your case) it's your Self Assessment return which determines the actual amount of relief due.

You may well receive too much or too little relief via your tax code and it's the return which finalises things.

HMRC tend to use the latest information available for your tax code.  So until recently that was probably the information on your 2020:21 tax return.

But it's now been superseded by your 2021:22 tax return so the information from that has been used to update your tax code.  But this is just provisional, it is your 2022:23 return which will determine the final position.

So if for example you only expect to make a gross contribution of say £4,000 instead of £10,000 in the current tax year you could ask HMRC to update your tax code to reflect this.  But it's still only provisional, your tax return is what settles things.  

If you left the tax code being based on £10k but only actually paid £4k you will just end up with a bigger Self Assessment bill (or a reduced refund).

waveyjane

OK I think I understand now. During my phone call with HMRC they said that I wasn't expected to make a self assessment just for claiming the rebate, and that I should just call or write to them next time with the gross contribution figure. That may be less confusing perhaps?