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

jim57 · 16 May at 5:43PM

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 · 16 May at 5:51PM

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 · 16 May at 5:51PM

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 · 16 May at 5:58PM

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 · 16 May at 7:25PM

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!

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

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