Pension Contribution in the "60% tax trap"- impact to Tax calc

icstm

Evening all, I'm hoping someone has experience of this, given the coverage in other threads,

I made a £2k pension contribution last tax year, guessing how much I was paid over £100k to try and bring me back down. However I had more savings interest than expected with the rate rises.

This means I still remained over the £100k threshold.

Normally below the £100k threshold, a £2k pension contribution would create a £800 rebate (eg 40% of £2k, as no tax relief is collected by the pension administrator, basic or higher rate).

HOWEVER, as this £2k contribution was in that 100-125 bracket, I think it impacts the 'adjusted net income' for what HMRC call your Personal Allowance. As I think pension contributions should not impact how the Personal Allowance goes down by £1 for every £2 earned.

So does this result in an additional rebate from HMRC? So the £800 + something more?

Dazed_and_C0nfused

Presumably you are referring to a "relief at source" pension contribution where the pension company added 25% to your net contribution (courtesy of HMRC).

If so, in the scenario you have outlined, there are two additional benefits.

1.  Your basic rate band is increased by the amount of the gross contributions.  So more income is taxed at 20% and less at 40%.

2.  Your adjusted net income is reduced by the amount of the gross contribution.  So you retain some (or all) of your Personal Allowance.

Did you hand over £1,600 or £2,000 to the pension company?

icstm

Dazed_and_C0nfused

Just to clarify, there was no RAS by this pension administrator, as I said, I am owned at least the full 40%.

Does that change anything?

And for the avoidance of doubt, I handed over £2k and only £2k was added to the pot.

Dazed_and_C0nfused

icstm said:

Dazed_and_C0nfused

Just to clarify, there was no RAS by this pension administrator, as I said, I am owned at least the full 40%.

Does that change anything?

And for the avoidance of doubt, I handed over £2k and only £2k was added to the pot.

Could you clarify how you made this contribution as that is very unusual method of getting money into a pension.

Is it a public sector pension scheme?

icstm

No, private sector, I made a 1-off BACS transfer to my DC company provided pension. (I normally do SS).

For some reason on these payments there is no tax relief. When under £100k earnings, I have previously just written to HMRC and they send me a cheque for 40% of what I paid in.

However this time I wanted to check if I am due more than 40% (per the OP) and why (so I can explain to HMRC

Dazed_and_C0nfused

icstm said:

No, private sector, I made a 1-off BACS transfer to my DC company provided pension. (I normally do SS).

For some reason on these payments there is no tax relief. When under £100k earnings, I have previously just written to HMRC and they send me a cheque for 40% of what I paid in.

However this time I wanted to check if I am due more than 40% (per the OP) and why (so I can explain to HMRC

I think you will find it very hard work to resolve this satisfactorily with HMRC.

I remember one other poster, on the pensions board, with a similar situation and it was a very protracted process I think.

But if you are successful then you can ignore my original post, there would be no increase to your basic rate band.

But £2,000 less of your income would be taxed (the contribution is treated like you have £2,000 extra Personal Allowance).

And your adjusted net income would be £2,000 less.  

Depending on how this goes you might want to stick with salary sacrifice (as it's more tax efficient than what you have done) or make a relief source contribution in future (same overall benefit to what you have done but quite possibly a whole lot easier to sort with HMRC!).

icstm

Dazed_and_C0nfused said:

But £2,000 less of your income would be taxed (the contribution is treated like you have £2,000 extra Personal Allowance).

And your adjusted net income would be £2,000 less. 

Thanks @Daze@Dazed_and_C0nfused

So why could HMRC show my Personal Allowance (Tapered) as only £1000 more?

Where would I see the "adjusted net income", or do you mean my "taxed income" is lowered by the exact amount the Personal Allowance was adjusted by?

If you only adjust my PA, then I think all they are playing with moving money that is either taxed at 0% (inside the PA) or at 20% (outside the PA but still below £50,270). However I require relief at 40% my marginal rate, how should that materialise?

Dazed_and_C0nfused

icstm said:

Dazed_and_C0nfused said:

But £2,000 less of your income would be taxed (the contribution is treated like you have £2,000 extra Personal Allowance).

And your adjusted net income would be £2,000 less. 

Thanks @Daze@Dazed_and_C0nfused

So why could HMRC show my Personal Allowance (Tapered) as only £1000 more?

Where would I see the "adjusted net income", or do you mean my "taxed income" is lowered by the exact amount the Personal Allowance was adjusted by?

If you only adjust my PA, then I think all they are playing with moving money that is either taxed at 0% (inside the PA) or at 20% (outside the PA but still below £50,270). However I require relief at 40% my marginal rate, how should that materialise?

I don't think HMRC ever tell you the adjusted net income figure they have used, you simply get a calculation, either PAYE or Self Assessment, with the appropriate Personal Allowance on.

I don't really know what you mean by the bit highlighted in bold.

Your Personal Allowance can only ever be adjusted downwards, you can't have a Personal Allowance greater than £12,570.  But you can have a, for want of a better word, extra "allowance" in your tax calculation which means £2,000 less income will then be taxed.

If the income actually taxed is reduced by £2,000 then why do you think this wouldn't be at 40%?  Based on your posts so far you are tens of thousands into the 40% band.

icstm

Hi, thanks for taking the time with this, very helpful. This is my first time with he closing of the last tax year in the "tax trap".

Yes, you are correct, so I had untaxed interest that took me over the £100k level, which resulted in my PA being adjusted downwards.

I assume that did (~12kPA - (amount over 100k ÷ 2))

However as you said, my pension contribution should have a few effects, one of which is to lessen the impact on that downward adjustment of the PA.

When I check the PA I get the amount above + another 1k (rather than 2k)
That is what I meant by "So why could HMRC show my Personal Allowance (Tapered) as only £1000 more?"

If the income actually taxed is reduced by £2,000 then why do you think this wouldn't be at 40%?

Ok, here is my thinking:

• The PA is defining how much is not taxed at 20% (as you pay 20% tax on the amount under £50,270 minus your PA
• I cannot see the total income being reduced by the 2k, so rather than being ~5k over the threshold, I should be only ~ £3k. As you say, they might not be adjusting that number, but the 'adjusted net income' which they might not show - hence my dilemma.
  

Dazed_and_C0nfused

Rather than trying to read between the lines can you confirm

A.  What you think your adjusted net income amount is?

B.  What deductions do you think should be made before your remaining taxable income is taxed?  Personal Allowance of £X being one deduction.  And the X cannot exceed £12,570.

icstm

A - 105 before 2k pension contribution (with no Relief at Source)

B - no idea

Basically if I have an income for 60k and make a 2k pension contribution I think I'm owned 40% back.
If now that income is in the tax trap, at 105k, then I need 60% back. But there is no actual "60% tax" rate, so how does that effective rate materialise in the HMRC process and where can I verify what they've done?