What does HMRC do with the other 25% on pension contribution?

Diesel3390

Hi All,

I pay £80 into my pension. The pension tops it up with £20 to get me up to £100.
As a higher rate tax payer, I then file a self assessment end of year to claim back £25 from HMRC.

I heard the extra £25 doesn't actually go into your pension pot aswell. I was told the HMRC can treat it any way they want, including reduction in tax liability, a rebate, or change to tax code.

What does that actually mean in practice? If you owe no further tax, does it mean they send that £25 as cash to your bank account? And if you owe tax they will just use that £25 to pay off that tax? Is that correct?

I have some rental income which I would need to pay tax on, so would the pension rebate just be used to pay off the rental income tax by HMRC, and anything left over they'd send as cash to my bank account?

Thanks

Dazed_and_C0nfused

Diesel3390 said:

Hi All,

I pay £80 into my pension. The pension tops it up with £20 to get me up to £100.
As a higher rate tax payer, I then file a self assessment end of year to claim back £25 from HMRC.

I heard the extra £25 doesn't actually go into your pension pot aswell. I was told the HMRC can treat it any way they want, including reduction in tax liability, a rebate, or change to tax code.

What does that actually mean in practice? If you owe no further tax, does it mean they send that £25 as cash to your bank account? And if you owe tax they will just use that £25 to pay off that tax? Is that correct?

I have some rental income which I would need to pay tax on, so would the pension rebate just be used to pay off the rental income tax by HMRC, and anything left over they'd send as cash to my bank account?

Thanks

Ther is really no such thing as a pension rebate.

The pension contributions are factored into your Self Assessment calculation by increasing your basic rate band, meaning more income can be taxed at 20% and less at 40% (or 45%).

That could mean you have a smaller Self Assessment liability or have overpaid (on your Self Assessment calculation).

If you have overpaid you can get a refund from HMRC.  This is always paid to you (or a nominee you sign the refund over to).  HMRC don't pay it into your pension fund.

They also never give pension tax relief for one tax year via the tax code of a different tax year.

But they do give provisional relief via your tax code in some cases.  The final amount of relief will be determined by your Self Assessment return.  Or if you don't file a return HMRC will review things after the end of the tax year and send a calculation if you are underpaid or due a refund.  Again any refund would come back to you, it doesn't get paid into your pension fund.

Albermarle

I pay £80 into my pension. The pension tops it up with £20 to get me up to £100.
As a higher rate tax payer, I then file a self assessment end of year to claim back £25 from HMRC.

If there was a rebate due, and all other things being equal ( as explained in the previous post) you would get a £20 rebate, not £25.

Just to be clear ( for the benefit maybe of other posters) many workplace pensions work in a different way, where contributions effectively come from untaxed pay, so you get all tax relief automatically into your pension pot.

Diesel3390

Albermarle said:

I pay £80 into my pension. The pension tops it up with £20 to get me up to £100.
As a higher rate tax payer, I then file a self assessment end of year to claim back £25 from HMRC.

If there was a rebate due, and all other things being equal ( as explained in the previous post) you would get a £20 rebate, not £25.

Just to be clear ( for the benefit maybe of other posters) many workplace pensions work in a different way, where contributions effectively come from untaxed pay, so you get all tax relief automatically into your pension pot.

Dazed_and_C0nfused said:

Diesel3390 said:

Hi All,

I pay £80 into my pension. The pension tops it up with £20 to get me up to £100.
As a higher rate tax payer, I then file a self assessment end of year to claim back £25 from HMRC.

I heard the extra £25 doesn't actually go into your pension pot aswell. I was told the HMRC can treat it any way they want, including reduction in tax liability, a rebate, or change to tax code.

What does that actually mean in practice? If you owe no further tax, does it mean they send that £25 as cash to your bank account? And if you owe tax they will just use that £25 to pay off that tax? Is that correct?

I have some rental income which I would need to pay tax on, so would the pension rebate just be used to pay off the rental income tax by HMRC, and anything left over they'd send as cash to my bank account?

Thanks

Ther is really no such thing as a pension rebate.

The pension contributions are factored into your Self Assessment calculation by increasing your basic rate band, meaning more income can be taxed at 20% and less at 40% (or 45%).

That could mean you have a smaller Self Assessment liability or have overpaid (on your Self Assessment calculation).

If you have overpaid you can get a refund from HMRC.  This is always paid to you (or a nominee you sign the refund over to).  HMRC don't pay it into your pension fund.

They also never give pension tax relief for one tax year via the tax code of a different tax year.

But they do give provisional relief via your tax code in some cases.  The final amount of relief will be determined by your Self Assessment return.  Or if you don't file a return HMRC will review things after the end of the tax year and send a calculation if you are underpaid or due a refund.  Again any refund would come back to you, it doesn't get paid into your pension fund.

Thanks both. Just trying to get my head around your comments.

So yes, I'm aware many workplace pensions put the money before its taxed.

What I'm talking about here is a one-off lump sum contribution from my bank account (i.e. using net pay after tax to make a one off contribution into pension).

Basically I have some rental income which I receive gross from the estate agent. I believe I owe HMRC about £5K in rental income tax which I haven't yet paid since my estate agent sends me the money gross. So I need to delcare it in the self-assessment form. So my thought was that if I pay some of my post-tax work salary money (not rental income but actual work salary income) into a pension pot then that could be used to get tax relief on the £5K that I owe.

The Hargreaves Lansdown calculator here below says that if I pay £16K lump sum into my pension, then:
https://www.hl.co.uk/pensions/tax-relief/calculator

1) The government adds 20% direct into my pension pot: that's £4K
2) I file self-assessment and claim an additional 25% (being in the higher 45% bracket): that's additional 5K

So the question is:
I know (1) gets paid directly into my pension pot. It's a good tax relief but doesn't actually help to offset the rental income tax of £5K

Would (2) therefore be used to offset the £5K tax that I owe on the rental side? Is that how the HMRC uses the money? So in effect I get no cash into my bank account since the HMRC will use that £5K relief to pay off the £5K that I owe them. Is that correct?

Thanks

BoGoF

Think you are over-complicating things for 2. If you are higher/additional rate taxpayer then your basic rate band is extended by the £20,000 gross payment.  So, assuming you are not a Scottish taxpayer you would not start paying HR tax until £70,270. 

Diesel3390

BoGoF said:

Think you are over-complicating things for 2. If you are higher/additional rate taxpayer then your basic rate band is extended by the £20,000 gross payment.  So, assuming you are not a Scottish taxpayer you would not start paying HR tax until £70,270. 

I get that... I just mean what is the actual "effect" of extending the basic rate band by £20K gross one-off payment...
Does it result in my tax for rental of £5K getting offset because of the extension of the basic rate band?
What's the actual effect

[Deleted User]

Diesel3390 said:

BoGoF said:

Think you are over-complicating things for 2. If you are higher/additional rate taxpayer then your basic rate band is extended by the £20,000 gross payment.  So, assuming you are not a Scottish taxpayer you would not start paying HR tax until £70,270. 

I get that... I just mean what is the actual "effect" of extending the basic rate band by £20K gross one-off payment...
Does it result in my tax for rental of £5K getting offset because of the extension of the basic rate band?
What's the actual effect

The effect is that you would pay £5k less tax on your TOTAL income for the year. That’s it! There is no offset against one particular type of income - your self-assessment bill will reduce by £5000. 

This will be compared with what you have paid during that year and any refund processed accordingly. 

Albermarle

The Hargreaves Lansdown calculator here below says that if I pay £16K lump sum into my pension, then:
https://www.hl.co.uk/pensions/tax-relief/calculator
1) The government adds 20% 25% direct into my pension pot: that's £4K

Small correction.

Otherwise as @[Deleted User] says.

Diesel3390

[Deleted User] said:

Diesel3390 said:

BoGoF said:

Think you are over-complicating things for 2. If you are higher/additional rate taxpayer then your basic rate band is extended by the £20,000 gross payment.  So, assuming you are not a Scottish taxpayer you would not start paying HR tax until £70,270. 

I get that... I just mean what is the actual "effect" of extending the basic rate band by £20K gross one-off payment...
Does it result in my tax for rental of £5K getting offset because of the extension of the basic rate band?
What's the actual effect

The effect is that you would pay £5k less tax on your TOTAL income for the year. That’s it! There is no offset against one particular type of income - your self-assessment bill will reduce by £5000. 

This will be compared with what you have paid during that year and any refund processed accordingly. 

Perfect. That works out good for me as its £5k tax less. Thank you

Diesel3390

Albermarle said:

The Hargreaves Lansdown calculator here below says that if I pay £16K lump sum into my pension, then:
https://www.hl.co.uk/pensions/tax-relief/calculator
1) The government adds 20% 25% direct into my pension pot: that's £4K

Small correction.

Otherwise as @[Deleted User] says.

Thank you. Important to know

TheAble

Out of interest if you're a 40% taxpayer what number do you put in your tax return if you top up your pension from your bank account? Say I put in £100, do I declare £125?

Also, suppose my taxable income from my job is £100,125. Is £100 the correct amount to top up my pension by if I want to get down to £100k, for the purposes of keeping my personal allowance intact for instance?

(Sorry if I'm hijacking the thread but felt a relevant continuation. Many thanks.)