Contributions Gross pay v Net pay

Scott_Chegg_

Hello,
I have been asked a question by a family member regarding pension contributions. I have searched the forum but couldn't seem to find any response that fitted.

My brother earns £57K and pays 32% into pension (from his pay, excluding company contributions) directly through payroll each month. He then separately pays about £100 a month from his net pay into a vanguard SIPP.

He is under the impression he should be making a self assessment tax return to claim back the additional 20% tax that would be paid from the 40% threshold.

I am not sure this is correct. Would anyone have a view? TIA

Flugelhorn

doesn't it just bring down the amount that is taxable ie to below the 40% threshold?

kimwp

My understanding is that he can claim back the tax he paid. So if he paid 20% on the money that is going into sipp, then he can get max 20% back .

Qyburn

Scott_Chegg_ said:

My brother earns £57K and pays 32% into pension (from his pay, excluding company contributions) directly through payroll each month. 

Is that contribution made by Salary Sacrifice, ie deducted before tax and NI, or is it what's misleadingly called "relief at source" where it's deducted after tax and NI?

Scott_Chegg_

yes the 32% is taken by his employer into their scheme so from gross pay. The £100 p/m going to Vanguard is going from net pay. This has 20% added to it through Vanguard claiming, as I understand it, basic rate tax back.

Dazed_and_C0nfused

Scott_Chegg_ said:

Hello,
I have been asked a question by a family member regarding pension contributions. I have searched the forum but couldn't seem to find any response that fitted.

My brother earns £57K and pays 32% into pension (from his pay, excluding company contributions) directly through payroll each month. He then separately pays about £100 a month from his net pay into a vanguard SIPP.

He is under the impression he should be making a self assessment tax return to claim back the additional 20% tax that would be paid from the 40% threshold.

I am not sure this is correct. Would anyone have a view? TIA

Firstly, a tax return isn't necessary just to claim tax relief on pension contributions.

Secondly, why does he think he's a higher rate payer?

If he is contributing 32% via net pay method then his taxable earnings will be ~£39k so unless you have omitted details of other taxable income he is nowhere near being liable to higher rate tax.

A RAS contribution to a SIPP would get basic rate relief (which Vanguard will automatically add), nothing further is due unless he is Scottish resident for tax purposes.

molerat

If the 32% is taken from his gross pay, before tax, he is not a higher rate tax payer so there is no further tax to reclaim from the SIPP, the already added basic rate tax is all he is entitled to.

Scott_Chegg_

Thanks for the comments. We were speaking about this yesterday and I think the question arose from him looking at a tax relief calculator from Which  
Tax relief on pension contributions explained - Which?

He plugged the numbers in and the result suggested an amount of higher-rate tax relief that can be claimed back: Around £1300 IIRC

Dazed_and_C0nfused

Scott_Chegg_ said:

Thanks for the comments. We were speaking about this yesterday and I think the question arose from him looking at a tax relief calculator from Which  
Tax relief on pension contributions explained - Which?

He plugged the numbers in and the result suggested an amount of higher-rate tax relief that can be claimed back: Around £1300 IIRC

To ensure the correct position is established you need to be clear about the methods used.

The £100 going into a SIPP will definitely be RAS (relief at source).  The only unknown is is he paying £80, which is topped up to £100.  Or £100, which is topped up to £125?

What does his P60 show his taxable income as? From what you have posted it would be ~£39k as the 32% is paid using the "net pay" method.

In which case he is clearly a basic rate payer and unless he's Scottish resident there is nothing more he can claim for.

NB.  The 32% contribution will have meant he avoided a mix of 20% and 40% tax on his salary.

Scott_Chegg_

The Vanguard payment is £100 per month leaving his bank a/c by direct debit

zagfles

Using calculators is pointless unless you understand what numbers you need to put in. 

What does his P60 say his taxable income was? If his salary is £57k and he pays 32% into a workplace pension using sal sac or "net pay", then his taxable income is probably around £39k. That's the number to put into the calculator.