Tax relief on SIPP contributions

talexuser

Can anyone explain why my tax code has been reduced please?

I put £2880 in my SIPP every year (the max allowed since retired) and always had £3600 added to my gross of private and state pensions as tax relief.

This year my private pension has gone above the 37700 20% tax limit by a small amount. HMRC has taken the 12570 personal allowance and subtracted the 11963 state pension for a tax allowance of £607 left.
They then took the 37700 20% tax limit, added the 607 for £38307.
My private pension gross is just above the 20% limit for the first time this year, namely £38445.
They subtract the 38307 from new gross of 38445 to get £138 in the 40% band.
So instead of the normal 3600 tax relief contributing to my tax code, they have subtracted 138 from 3600 for 3462 meaning I will pay slightly more PAYE tax from the private pension.

Is this the correct way of calculating this, as I have always read that 20% relief was available tilll the normal limits, but in the 40% band you had 40% relief on pension contributions, whereas above I seem to be losing tax relief in the tax paid on the private pension?

Nomunnofun1

That is quite a convoluted way of calculating!

The bottom line is that your income is £50408 which, as you say, is £138 above the amount of £50270 when you start to pay 40% tax. 

Accordingly you are only permitted to claim 40% relief on your SIPP on £138 of income. This amounts to £27.60 of tax relief. 

I don’t understand this:

‘I put £2880 in my SIPP every year (the max allowed since retired) and always had £3600 added to my gross of private and state pensions as tax relief’

The pension company would automatically claim the 20% relief on the SIPP to bring the gross contribution to £3600 with no intervention from HMRC. 

Perhaps you can detail your current and previous tax codes?

Dazed_and_C0nfused

talexuser said:

Can anyone explain why my tax code has been reduced please?

I put £2880 in my SIPP every year (the max allowed since retired) and always had £3600 added to my gross of private and state pensions as tax relief.

This year my private pension has gone above the 37700 20% tax limit by a small amount. HMRC has taken the 12570 personal allowance and subtracted the 11963 state pension for a tax allowance of £607 left.
They then took the 37700 20% tax limit, added the 607 for £38307.
My private pension gross is just above the 20% limit for the first time this year, namely £38445.
They subtract the 38307 from new gross of 38445 to get £138 in the 40% band.
So instead of the normal 3600 tax relief contributing to my tax code, they have subtracted 138 from 3600 for 3462 meaning I will pay slightly more PAYE tax from the private pension.

Is this the correct way of calculating this, as I have always read that 20% relief was available tilll the normal limits, but in the 40% band you had 40% relief on pension contributions, whereas above I seem to be losing tax relief in the tax paid on the private pension?

That really doesn't make sense.

If you weren't liable to higher rate tax in previous years (and weren't Scottish resident) then there would not have been any additional relief due, the £720 added to your £2,880 to make the gross contribution of £3,600 is it.  There is no further benefit.

talexuser

Sorry if I didn't explain in the correct terms. In previous years the SIPP relief of 3600 gross was added to private and state pensions gross to remain in the 20% band for that total amount, without the 3600 I would have started to get into the 40% band from income alone. I was only in the 40% band for savings interest and dividends.

PAYE tax code calculation last year was personal allowance 12570 plus 3600 pension 20% relief equals 16170 allowances minus state pension 11502 last year equals 4685 tax allowance, code 468.

Now this year 12570 plus 3462 pension relief equals 16032 allowances minus 11963 state pension is 4069 tax allowance, code 406.

What I can't understand is in previous years the tax code allowance calculation included 3600, but now is the 3462 mentioned above. This means extra tax in the PAYE code for the private pension since the allowance is £138 less?

Not being familiar with the 40% rules I don't understand how I get the this £27.60 of 40% tax relief if I'm paying a higher tax through the tax code being lower. Does this have to go in the self assessment for this tax year somewhere? 

Nomunnofun1

As I explained earlier you will only pay £138 at 40% if you made absolutely no contribution to a SIPP. 

Your provider is obtaining tax relief at 20% on your contribution of £2880 to become a gross of £3600. You claim the additional relief by informing HMRC. 

This relief will be £138 @ 20% (40% -20%) as you can only claim higher rate relief to the extent that you have income charged at 40%. £138 at 20% is £27.60. 

HMRC should adjust your tax code to achieve this extra relief - the adjustment should be 69 (40% of £69 is £27.60).

You should therefore have 69 added to your tax free allowance of 12570 making 12639 - a code of 1263L. The code you have at the moment, therefore, is too high, presumably because HMRC have a higher estimate of total income than reality.

talexuser

Thanks for your help. I undertsand the Sipp relief remains. My confusion is just over the tax code. It was 12570 plus 3600 (gross Sipp) minus the state pension which is paid untaxed since out of remaining personal allowance. 

You explain that now in 40% bracket, the tax free allowance should be increased by 69. But they have decreased the tax free allowance by 138 (the amount in the 40% band) as above (3600-138 = 3462 plus the 12570) and this is why I don't understand how it now works.

How do I inform HMRC please? They already know because they have told me how this years tax code has been calculated by the method above and in previous post which includes the known figure in the 40% band.

QrizB

Unless you're desperate for the ~£2 a month, you don't need to inform HMRC. Tax codes are only ever provisional. It will all be squared away at the end of the tax year.

talexuser

I'm trying to understand how the system works. I'm told that pension relief on Sipp contributions effectively increases your 20% tax band. According to my tax calculation spreadsheet I am not in the 40% band for income, just for savings interest and dividends, which for this tax year have obviously not been calculated yet.

Personal allowance 12750, plus 20% band 37700 equals 50270, plus Sipp relief of 3600 is 53870 adjusted net income in basic band.
Income is 38445 pension plus state pension 11973 equals 50418, which is lower than 53870 and means I have spare 20% band for savings and dividends before paying 40%.

HMRC use 3462 Sipp allowance instead of 3600 in the tax code meaning I pay more PAYE tax in the private pension income and I can't understand how this works if you are supposed to get the full relief.

Nomunnofun1

talexuser said:

I'm trying to understand how the system works. I'm told that pension relief on Sipp contributions effectively increases your 20% tax band. According to my tax calculation spreadsheet I am not in the 40% band for income, just for savings interest and dividends, which for this tax year have obviously not been calculated yet.

Personal allowance 12750, plus 20% band 37700 equals 50270, plus Sipp relief of 3600 is 53870 adjusted net income in basic band.
Income is 38445 pension plus state pension 11973 equals 50418, which is lower than 53870 and means I have spare 20% band for savings and dividends before paying 40%.

HMRC use 3462 Sipp allowance instead of 3600 in the tax code meaning I pay more PAYE tax in the private pension income and I can't understand how this works if you are supposed to get the full relief.

I’m sorry - you have more or less ignored everything that I have said - not sure I can be of any more help. 

Hopefully someone else can elaborate further. 

talexuser

Nomunnofun1 , I'm sorry if I'm not understanding, I'm getting older and this stuff is new to me. Your explanation of the relief from the 40% band is clear, as is the calculation of what is needed to add to the allowance (the 69).

There is no 69 added to the tax code notified, they have instead subtracted 138, and they know the exact income. Does this not mean the allowance has gone down and you pay more tax? What is the process of informing HMRC of the additional relief please, I'm on self assesment? 

QrizB

When you submit your self assessment, there's a box for the gross value of personal contributions to pension schemes. Put £3600 in that box and HMRC will use that when calculating your liability for the year.