Pension tax relief for higher-rate earners, do I lose 5p?

jim57

Hello all,

I think this is correct for a basic-rate tax payer (please correct me if I'm wrong!):

• Earn £1 (gross)
• Tax: 20p
• Take home: 80p
• ...
• Pay take-home pay (80p) into SIPP
• 20p in tax relief claimed automatically by the pension provider (80p * 0.25)
• ...
• Now my pension has 80p + 20p = £1, the original amount I earned

I'm confused about the higher-rate case:

• Earn £1
• Tax: 40p
• Take home: 60p
• ...
• Pay take-home pay (60p) into SIPP
• 15p in tax relief claimed automatically by the pension provider (60p * 0.25)
• ...
• Fill in a tax return, saying I contributed £1 to a SIPP. That shifts my tax threshold £1 higher
• Means what would have been 40p tax becomes 20p tax for £1 of my earnings
• I therefore get a 20p refund
• ...
• Now my pension has 60p + 15p = 75p
• And I have a 20p refund
• Total 75p + 20p = 95p

I've lost 5p somewhere. Is this right? Is it just the case that a higher-rate tax payer doesn't end up with 100% of their gross pay if paying into a SIPP? I've always read everywhere that that's the case, hence my confusion!

Thanks!

artyboy

No. As an HR taxpayer, you still pay in 80p to the pension, which has BR gross up to £1, and you reclaim the other 20p of HR relief through self assessment.

Hey presto, £1 of pension for the same cost as the 60p you'd have otherwise taken home.

jem16

Your mistake, like many others have done, is to confuse net with gross.

In your second example you should have paid £0.80 into the SIPP. That would have been grossed up to £1 by 20p tax relief. You then claim the extra tax relief based on £1 so get 20p refund meaning that for £1 into your pension it cost you 60p.

With your example you have only put £0.75 into your pension so your tax return should only have claimed £0.75 giving you another 15p refund. So £0.75 into your pension at a cost of £0.40.

Dazed_and_C0nfused

jim57 said:

Hello all,

I think this is correct for a basic-rate tax payer (please correct me if I'm wrong!):

• Earn £1 (gross)
• Tax: 20p
• Take home: 80p
• ...
• Pay take-home pay (80p) into SIPP
• 20p in tax relief claimed automatically by the pension provider (80p * 0.25)
• ...
• Now my pension has 80p + 20p = £1, the original amount I earned

I'm confused about the higher-rate case:

• Earn £1
• Tax: 40p
• Take home: 60p
• ...
• Pay take-home pay (60p) into SIPP
• 15p in tax relief claimed automatically by the pension provider (60p * 0.25)
• ...
• Fill in a tax return, saying I contributed £1 to a SIPP. That shifts my tax threshold £1 higher
• Means what would have been 40p tax becomes 20p tax for £1 of my earnings
• I therefore get a 20p refund
• ...
• Now my pension has 60p + 15p = 75p
• And I have a 20p refund
• Total 75p + 20p = 95p

I've lost 5p somewhere. Is this right? Is it just the case that a higher-rate tax payer doesn't end up with 100% of their gross pay if paying into a SIPP? I've always read everywhere that that's the case, hence my confusion!

Thanks!

You are comparing apples and pears.

Contributing 80p (£1 gross) is going to give a different outcome to contributing 60p (75p gross).

You need to compare the same contributions.

squirrelpie

jim57 said:

I'm confused about the higher-rate case:

• Fill in a tax return, saying I contributed £1 to a SIPP. That shifts my tax threshold £1 higher

Err, but by your own statement you have only contributed 75p to your SIPP. So claiming you had contributed £1 is a poor idea that might get you prosecuted for fraud or somesuch!