Higher tax relief questions

WannabeeMillionaire

Hi,

If I make an additional contribution to my pension, my pension provider applies basic rate tax relief. So, for example, I pay £2000 and £2500 is paid into my pension.

I then claim the higher rate tax relief in my self assessment. It states that this should include the gross amount, so the first question is, is the gross amount £2500? Or is it the £2000 plus the higher rate tax relief?

The second question is how I receive the additional tax relief. Does this just changes my personal tax free allowance or taxable income so I effectively receive a tax reduction?

Lastly, assuming this is just received as a tax reduction, then the additional money hasn't actually made it into my pension? So does this mean the £60000 limit is always going to be my contribution + basic rate tax relief?

I hope these questions make sense!

Thanks

Green_hopeful

I think I can answer some of your questions.

 WannabeeMillionaire said:

Hi,

If I make an additional contribution to my pension, my pension provider applies basic rate tax relief. So, for example, I pay £2000 and £2500 is paid into my pension. Yes it’s called ‘at source’. If you put £40k in the pension provider applies for a tax rebate on your behalf of £10k. You then get £50k in your pension. Some providers automatically provide the rebate and some wait until they have received the money and then credit your account. This summer it was taking a bit over 8 weeks to come. 

I then claim the higher rate tax relief in my self assessment. It states that this should include the gross amount, so the first question is, is the gross amount £2500? Or is it the £2000 plus the higher rate tax relief?  I think this is the £2500 figure. I claimed mine back manually because I don’t do self assessment. The template I used said ‘including basic rate tax relief’.

The second question is how I receive the additional tax relief. Does this just changes my personal tax free allowance or taxable income so I effectively receive a tax reduction? I think they refund the money in a cheque. I haven’t seen any reference to other options. But I don’t do self assessment. 

Lastly, assuming this is just received as a tax reduction, then the additional money hasn't actually made it into my pension? So does this mean the £60000 limit is always going to be my contribution + basic rate tax relief? Yes I think your annual allowance is the money you pay in plus the basic rate tax relief. 

I hope these questions make sense!

Thanks

af1963

The contribution will reduce your tax due (as I recall, they do this by increasing the amount of your basic rate tax band by the amount of the gross contribution, so you'd potentially get an extra 2500 taxed at 20% in your example, instead of at 40%, as long as you were at least 2500 over the starting point for higher rate.) They will compare the calculated tax due with what you've already paid ( e.g. your PAYE and any other payments you've made) and if you've paid more than due, you'll get a refund, which you can get sent to your bank as one of the options in Self Assessment.

The extra tax relief doesn't end up in your pension. You end up having paid 1500 to get 2500 in your pension.

Slightly different rates in Scotland but the same principle.

WannabeeMillionaire

Thanks both, so just to clarify:

• I pay £2000 and the pension provider deposits £2500 in my pension (contribution + basic rate tax relief)
• I receive higher rate tax relief by them altering my tax band threshold so i pay less tax on my other income
• Anyone earning enough could pay £48000 + basic rate tax relief = total of £60k into their pension?

Albermarle

Green_hopeful said:

I think I can answer some of your questions.

 WannabeeMillionaire said:

Hi,

If I make an additional contribution to my pension, my pension provider applies basic rate tax relief. So, for example, I pay £2000 and £2500 is paid into my pension. Yes it’s called ‘at source’. If you put £40k in the pension provider applies for a tax rebate on your behalf of £10k. You then get £50k in your pension. Some providers automatically provide the rebate and some wait until they have received the money and then credit your account. This summer it was taking a bit over 8 weeks to come. 

I then claim the higher rate tax relief in my self assessment. It states that this should include the gross amount, so the first question is, is the gross amount £2500? Or is it the £2000 plus the higher rate tax relief?  I think this is the £2500 figure. I claimed mine back manually because I don’t do self assessment. The template I used said ‘including basic rate tax relief’.

The second question is how I receive the additional tax relief. Does this just changes my personal tax free allowance or taxable income so I effectively receive a tax reduction? I think they refund the money in a cheque. I haven’t seen any reference to other options. But I don’t do self assessment. 

Lastly, assuming this is just received as a tax reduction, then the additional money hasn't actually made it into my pension? So does this mean the £60000 limit is always going to be my contribution + basic rate tax relief? Yes I think your annual allowance is the money you pay in plus the basic rate tax relief. 

I hope these questions make sense!

Thanks

Some corrections needed,
The Annual Allowance of £60K includes employer contributions, employee contributions + any tax relief added.
It is the £2500 figure.
You will get a cheque/tax rebate the first year. After that HMRC will assume you will make the same contribution next year and adjust your tax code so you pay less tax and no need for a later rebate.

Albermarle

WannabeeMillionaire said:

Thanks both, so just to clarify:

• I pay £2000 and the pension provider deposits £2500 in my pension (contribution + basic rate tax relief)
• I receive higher rate tax relief by them altering my tax band threshold so i pay less tax on my other income
• Anyone earning enough could pay £48000 + basic rate tax relief = total of £60k into their pension?

All correct  as long as your employer is operating a Relief at Source scheme, where your contributions come out of your taxed pay. which seems to be your situation.

The only point worth making is that if you have not used your full annual allowance in the previous 3 years ( when it was £40K) you can bring forward this unused allowance and add more than £60K.
However you personally can never add more ( including the 25% tax relief added) than your gross salary in this tax year.

jamesd

If you do see the calculations you'll find that HMRC increase your basic rate tax band by the gross pension contribution amount and that's what delivers the higher rate tax relief.

You can tell HMRC your expected contribution in the first year and HMRC will change your tax code to get you the relief via PAYE if enough months are left.

SouthCoastBoy

Albermarle said:

Green_hopeful said:

I think I can answer some of your questions.

 WannabeeMillionaire said:

Hi,

If I make an additional contribution to my pension, my pension provider applies basic rate tax relief. So, for example, I pay £2000 and £2500 is paid into my pension. Yes it’s called ‘at source’. If you put £40k in the pension provider applies for a tax rebate on your behalf of £10k. You then get £50k in your pension. Some providers automatically provide the rebate and some wait until they have received the money and then credit your account. This summer it was taking a bit over 8 weeks to come. 

I then claim the higher rate tax relief in my self assessment. It states that this should include the gross amount, so the first question is, is the gross amount £2500? Or is it the £2000 plus the higher rate tax relief?  I think this is the £2500 figure. I claimed mine back manually because I don’t do self assessment. The template I used said ‘including basic rate tax relief’.

The second question is how I receive the additional tax relief. Does this just changes my personal tax free allowance or taxable income so I effectively receive a tax reduction? I think they refund the money in a cheque. I haven’t seen any reference to other options. But I don’t do self assessment. 

Lastly, assuming this is just received as a tax reduction, then the additional money hasn't actually made it into my pension? So does this mean the £60000 limit is always going to be my contribution + basic rate tax relief? Yes I think your annual allowance is the money you pay in plus the basic rate tax relief. 

I hope these questions make sense!

Thanks

Some corrections needed,
The Annual Allowance of £60K includes employer contributions, employee contributions + any tax relief added.
It is the £2500 figure.
You will get a cheque/tax rebate the first year. After that HMRC will assume you will make the same contribution next year and adjust your tax code so you pay less tax and no need for a later rebate.

Which I find annoying, every year I ask them to change it back as there is no guarantee I will be able to afford the same contributions, this year is especially true as I have moved to a job paying about 30% less

house_help

SouthCoastBoy said:

Albermarle said:

Green_hopeful said:

I think I can answer some of your questions.

 WannabeeMillionaire said:

Hi,

If I make an additional contribution to my pension, my pension provider applies basic rate tax relief. So, for example, I pay £2000 and £2500 is paid into my pension. Yes it’s called ‘at source’. If you put £40k in the pension provider applies for a tax rebate on your behalf of £10k. You then get £50k in your pension. Some providers automatically provide the rebate and some wait until they have received the money and then credit your account. This summer it was taking a bit over 8 weeks to come. 

I then claim the higher rate tax relief in my self assessment. It states that this should include the gross amount, so the first question is, is the gross amount £2500? Or is it the £2000 plus the higher rate tax relief?  I think this is the £2500 figure. I claimed mine back manually because I don’t do self assessment. The template I used said ‘including basic rate tax relief’.

The second question is how I receive the additional tax relief. Does this just changes my personal tax free allowance or taxable income so I effectively receive a tax reduction? I think they refund the money in a cheque. I haven’t seen any reference to other options. But I don’t do self assessment. 

Lastly, assuming this is just received as a tax reduction, then the additional money hasn't actually made it into my pension? So does this mean the £60000 limit is always going to be my contribution + basic rate tax relief? Yes I think your annual allowance is the money you pay in plus the basic rate tax relief. 

I hope these questions make sense!

Thanks

Some corrections needed,
The Annual Allowance of £60K includes employer contributions, employee contributions + any tax relief added.
It is the £2500 figure.
You will get a cheque/tax rebate the first year. After that HMRC will assume you will make the same contribution next year and adjust your tax code so you pay less tax and no need for a later rebate.

Which I find annoying, every year I ask them to change it back as there is no guarantee I will be able to afford the same contributions, this year is especially true as I have moved to a job paying about 30% less

There is a second box on the SA form in pension contribution section (box 1.1) that you can fill in to say how much of the amount in box 1 is a one off for that year. If put the same as what you put in box 1 they will not change your tax code for following year.

WannabeeMillionaire

Thanks all!