Higher rate tax and pension contribution question

Shickly

Hello

I'd like to ask a question to those out there who are a little more clued up than myself and my colleagues when it comes to higher rate tax, refunds and pension contributions. I have spent most of today trying to look into this, with little to no luck in finding the answers to the specific questions I am after.

I work in the public sector, and have a defined benefit contribution pension scheme, which takes our contributions pre-tax.

I will use round numbers in my example to keep things simple, but they are near enough the actual numbers in question.

I currently earn approximately 51k basic salary, which is on track to be approximately £56k this financial year including overtime. It will go up next year to approximately £58k basic and 65k gross (this is relevant for my second question)

I contribute approximately £500/month into my pension scheme (£6k/year). This will also go up next year to approximately £550/month (£6.6k/year)

Through looking at my payslips, the portion of my salary which goes into pension contributions does not seem to be taxed. Hence increasing the threshold at which I end up paying higher rate tax, from £50270, by however much I contribute, i.e. £6k this year, to £56,270.

Hence, if all ends up how expected this financial year, I should not pay any higher rate/40% tax (as £56270>£56k). However, due to each month not being uniform in terms of OT pay received, there will inevitably months where I go over the limit of £56,270/12, (£4689 per month). For example last month's I earned just over £5k gross, and ended up having tax deducted at the 40% rate.

My first question is: Will the 40% tax that I pay over the course of the year be automatically refunded to me by HMRC at the end of the financial year? Or will I have to claim this myself? Or is it the case that due to the fact that I earn over the £50,270 threshold, and the only reason I'm not paying the 40% tax month on month being due to my pension contributions means that I am not refunded the 40% tax that is paid?

My second question is, next year, of course I will be paying 40% tax and that is unavoidable as the OT is part of the job. I'll be paying this on the portion of my income over £56,870 (being £50,270 + (550*12)). Hence on approximately £8130 (£65000 - £56870).

How does it work in terms of contributing this £8130*0.6 = £4847, (or whatever it may end up being post NI) of post tax income into a private pension scheme? And how best to work out exactly how much it is that I need to contribute to a private pension In order to avoid paying the higher rate tax on this? Can I do this after the end of the financial year once I know exactly how much income I have paid the higher rate on? Or am I supposed to estimate this based on my forecasted earnings as the year goes on?

I would appreciate any answers or anyone pulling me up on the assumptions I have made from the reading that I have done, as I may have misinterpreted some of the information I have read online.

jaybeetoo

As you are in PAYE, and I assume you don’t have a month 1 tax code, you will pay the correct amount of income tax.

If you are a 40% tax payer and pay into a private pension, your pension will automatically receive the basic rate tax relief.  When you complete your tax return, you need to declare the private pension contributions and HMRC will refund you the difference between basic rate tax and 40% tax on your contributions.

Dazed_and_C0nfused

Shickly said:

Hello

I'd like to ask a question to those out there who are a little more clued up than myself and my colleagues when it comes to higher rate tax, refunds and pension contributions. I have spend most of today trying to look into this, with little to no luck in finding the answers to the specific questions I am after.

I work in the public sector, and have a defined benefit contribution pension scheme, which takes our contributions pre-tax.

I will use round numbers in my example to keep things simple, but they are near enough the actual numbers in question.

I currently earn approximately 51k basic salary, which is on track to be approximately £56k this financial year including overtime. It will go up next year to approximately £58k basic and 65k gross (this is relevant for my second question)

I contribute approximately £500/month into my pension scheme (£6k/year). This will also go up next year to approximately £550/month (£6.6k/year)

Through looking at my payslips, the portion of my salary which goes into pension contributions does not seem to be taxed. Hence increasing the threshold at which I end up paying higher rate tax, from £50270, by however much I contribute, i.e. £6k this year, to £56,270.

Hence, if all ends up how expected this financial year, I should not pay any higher rate/40% tax (as £56270>£56k). However, due to each month not being uniform in terms of OT pay received, there will inevitably months where I go over the limit of £56,270/12, (£4689 per month). For example last month's I earned just over £5k gross, and ended up having tax deducted at the 40% rate.

My first question is: Will the 40% tax that I pay over the course of the year be automatically refunded to me by HMRC at the end of the financial year? Or will I have to claim this myself? Or is it the case that due to the fact that I earn over the £50,270 threshold, and the only reason I'm not paying the 40% tax month on month being due to my pension contributions means that I am not refunded the 40% tax that is paid?

My second question is, next year, of course I will be paying 40% tax and that is unavoidable as the OT is part of the job. I'll be paying this on the portion of my income over £56,870 (being £50,270 + (550*12)). Hence on approximately £8130 (£65000 - £56870).

How does it work in terms of contributing this £8130*0.6 = £4847, (or whatever it may end up being post NI) of post tax income into a private pension scheme? And how best to work out exactly how much it is that I need to contribute to a private pension In order to avoid paying the higher rate tax on this? Can I do this after the end of the financial year once I know exactly how much income I have paid the higher rate on? Or am I supposed to estimate this based on my forecasted earnings as the year goes on?

I would appreciate any answers or anyone pulling me up on the assumptions I have made from the reading that I have done, as I may have misinterpreted some of the information I have read online.

I think you need to take a closer look at your payslips.

You only pay higher rate tax on the amount you are over the higher rate threshold each month.

So if by the end of the tax year your earnings are say £50,000 and you have no other sources of taxable income you won't have paid any higher rate tax.  Well you will but it gets refunded via your payslip when you drop back to just being a basic rate payer.

The beauty of your pension contributions are that they are made using the "net pay" so you always get the maximum possible tax saving each pay day, there is never anything else for you to claim.

If you make "relief at source" contributions to a personal pension or SIPP you only ever get basic rate tax relief added to your contribution.  For example if you pay £800 then £200 is added in pension tax relief making a gross contribution of £1,000.  You need to claim any additional relief due from HMRC.  You see the benefit of that, it does not get added to your personal pension/SIPP. 

Note, relief at source contributions do not reduce your taxable income.  They increase your basic rate band.

Also you are massively overcomplicating this.  HMRC are interested in taxable income.  If you earn say £56,000 and pay £6,000 in net pay contributions your P60 will show taxable earnings of £50,000, not £56,000.  The £56,000 is simply not relevant for calculating your tax liability.

Finally, you can only ever get tax relief for the tax year you make the contributions in.  You can never back date pension contributions.

Shickly

Dazed_and_C0nfused said:

I think you need to take a closer look at your payslips.

You only pay higher rate tax on the amount you are over the higher rate threshold each month.

So if by the end of the tax year your earnings are say £50,000 and you have no other sources of taxable income you won't have paid any higher rate tax.  Well you will but it gets refunded via your payslip when you drop back to just being a basic rate payer.

The beauty of your pension contributions are that they are made using the "net pay" so you always get the maximum possible tax saving each pay day, there is never anything else for you to claim.

If you make "relief at source" contributions to a personal pension or SIPP you only ever get basic rate tax relief added to your contribution.  For example if you pay £800 then £200 is added in pension tax relief making a gross contribution of £1,000.  You need to claim any additional relief due from HMRC.  You see the benefit of that, it does not get added to your personal pension/SIPP. 

Note, relief at source contributions do not reduce your taxable income.  They increase your basic rate band.

Also you are massively overcomplicating this.  HMRC are interested in taxable income.  If you earn say £56,000 and pay £6,000 in net pay contributions your P60 will show taxable earnings of £50,000, not £56,000.  The £56,000 is simply not relevant for calculating your tax liability.

Finally, you can only ever get tax relief for the tax year you make the contributions in.  You can never back date pension contributions.

Thank you for the reply. I am aware that we only pay higher rate tax on the amount over the threshold. When I said I had tax deducted at the higher rate bracket last month, I meant it in the sense that my tax deduction indicated to me that a proportion of it was at the higher rate. 

I'm sure that my pension contributions are made from gross pay and not net pay; i.e. taken out prior to any income tax having been paid. So that line in regards to "the beauty of your pension contributions are that they are made using the net pay" has confused me a little. I am not aiming to become an expert in all things tax/pension, however, if you're confirming that if the figure of my gross income - employee pension contributions is below the higher bracket threshold at the end of the financial year, everything is done for me and I do not need to take any action to reclaim any 40% tax paid on months like last month, I am a happy man.

So you're saying that any SIPP/personal pension contributions I make on net income above the threshold, I will get a 20% bonus on into the pension, plus a further 20% bonus direct to my bank account once claimed through a tax return?

Dazed_and_C0nfused

Shickly said:

Dazed_and_C0nfused said:

I think you need to take a closer look at your payslips.

You only pay higher rate tax on the amount you are over the higher rate threshold each month.

So if by the end of the tax year your earnings are say £50,000 and you have no other sources of taxable income you won't have paid any higher rate tax.  Well you will but it gets refunded via your payslip when you drop back to just being a basic rate payer.

The beauty of your pension contributions are that they are made using the "net pay" so you always get the maximum possible tax saving each pay day, there is never anything else for you to claim.

If you make "relief at source" contributions to a personal pension or SIPP you only ever get basic rate tax relief added to your contribution.  For example if you pay £800 then £200 is added in pension tax relief making a gross contribution of £1,000.  You need to claim any additional relief due from HMRC.  You see the benefit of that, it does not get added to your personal pension/SIPP. 

Note, relief at source contributions do not reduce your taxable income.  They increase your basic rate band.

Also you are massively overcomplicating this.  HMRC are interested in taxable income.  If you earn say £56,000 and pay £6,000 in net pay contributions your P60 will show taxable earnings of £50,000, not £56,000.  The £56,000 is simply not relevant for calculating your tax liability.

Finally, you can only ever get tax relief for the tax year you make the contributions in.  You can never back date pension contributions.

Thank you for the reply. I am aware that we only pay higher rate tax on the amount over the threshold. When I said I had tax deducted at the higher rate bracket last month, I meant it in the sense that my tax deduction indicated to me that a proportion of it was at the higher rate. 

I'm sure that my pension contributions are made from gross pay and not net pay; i.e. taken out prior to any income tax having been paid. So that line in regards to "the beauty of your pension contributions are that they are made using the net pay" has confused me a little. I am not aiming to become an expert in all things tax/pension, however, if you're confirming that if the figure of my gross income - employee pension contributions is below the higher bracket threshold at the end of the financial year, everything is done for me and I do not need to take any action to reclaim any 40% tax paid on months like last month, I am a happy man.

So you're saying that any SIPP/personal pension contributions I make on net income above the threshold, I will get a 20% bonus on into the pension, plus a further 20% bonus direct to my bank account once claimed through a tax return?

Pension terminology can be confusing.  Net pay contributions are where you are in an employers scheme and the pension contributions are deducted before tax.

AIUI most if not all civil service pensions use the net pay method.  For example you earn £56,000 contribute £6,000 and end up with a P60 showing taxable earnings of £50,000.  As a taxpayer you can never claim any extra tax relief on net pay contributions as you always receive the maximum possible relief each pay day.  

Relief at source contributions to a SIPP or personal pension actually have 25% added (£800 becomes £1,000).  Which is tax relief of 20% when you look at the gross contribution.

You do not get an "extra" 20%.  You get a tax saving which is usually determined by how much higher rate tax you are liable to.  For example if you pay £1,000 (gross) into a SIPP and only pay higher rate tax on £5 you would get a personal tax saving of £1.  Not £200.

But there can be other benefits as well.  Avoiding higher rate tax would make you eligible for Marriage Allowance and be entitled to a larger savings nil rate band (aka Personal Savings Allowance).

Why would you be completing a tax return?  Nothing you have posted so far suggested you needed to file a return.

Shickly

Dazed_and_C0nfused said:

Pension terminology can be confusing.  Net pay contributions are where you are in an employers scheme and the pension contributions are deducted before tax.

AIUI most if not all civil service pensions use the net pay method.  For example you earn £56,000 contribute £6,000 and end up with a P60 showing taxable earnings of £50,000.  As a taxpayer you can never claim any extra tax relief on net pay contributions as you always receive the maximum possible relief each pay day.  

Relief at source contributions to a SIPP or personal pension actually have 25% added (£800 becomes £1,000).  Which is tax relief of 20% when you look at the gross contribution.

You do not get an "extra" 20%.  You get a tax saving which is usually determined by how much higher rate tax you are liable to.  For example if you pay £1,000 (gross) into a SIPP and only pay higher rate tax on £5 you would get a personal tax saving of £1.  Not £200.

But there can be other benefits as well.  Avoiding higher rate tax would make you eligible for Marriage Allowance and be entitled to a larger savings nil rate band (aka Personal Savings Allowance).

Why would you be completing a tax return?  Nothing you have posted so far suggested you needed to file a return.

Ah ok, that makes a lot more sense, thank you for clarifying.

Yes, I have just gone onto my employer pay portal and can see that my P60 from last year showed my taxable income as far less than my total income, which mirrors your explanation perfectly.

Ok, that too makes sense in regards to the 25%

My claim of 20% further was more so because I would not be looking to put any contributions into a SIPP unless they were from taxable earnings received above the threshold, i.e. given my initial example of £65k next year, and £6600 in pension contributions, therefore a taxable income of £58,400. I'd only look to put the difference of £58,400-50,270 (net difference of course) into a SIPP. I would not be interested in contributing any further than this. 

From what I have read, the initial 20% rebate in a SIPP/private pension is automatic, but to claim the 20-40% tax back, one must complete a tax return/self assessment. Am I mistaken in this belief?

Dazed_and_C0nfused

Shickly said:

Dazed_and_C0nfused said:

Pension terminology can be confusing.  Net pay contributions are where you are in an employers scheme and the pension contributions are deducted before tax.

AIUI most if not all civil service pensions use the net pay method.  For example you earn £56,000 contribute £6,000 and end up with a P60 showing taxable earnings of £50,000.  As a taxpayer you can never claim any extra tax relief on net pay contributions as you always receive the maximum possible relief each pay day.  

Relief at source contributions to a SIPP or personal pension actually have 25% added (£800 becomes £1,000).  Which is tax relief of 20% when you look at the gross contribution.

You do not get an "extra" 20%.  You get a tax saving which is usually determined by how much higher rate tax you are liable to.  For example if you pay £1,000 (gross) into a SIPP and only pay higher rate tax on £5 you would get a personal tax saving of £1.  Not £200.

But there can be other benefits as well.  Avoiding higher rate tax would make you eligible for Marriage Allowance and be entitled to a larger savings nil rate band (aka Personal Savings Allowance).

Why would you be completing a tax return?  Nothing you have posted so far suggested you needed to file a return.

Ah ok, that makes a lot more sense, thank you for clarifying.

Yes, I have just gone onto my employer pay portal and can see that my P60 from last year showed my taxable income as far less than my total income, which mirrors your explanation perfectly.

Ok, that too makes sense in regards to the 25%

My claim of 20% further was more so because I would not be looking to put any contributions into a SIPP unless they were from taxable earnings received above the threshold, i.e. given my initial example of £65k next year, and £6600 in pension contributions, therefore a taxable income of £58,400. I'd only look to put the difference of £58,400-50,270 (net of course) into a SIPP. I would not be interested in contributing any further than this. 

From what I have read, the initial 20% rebate in a SIPP/private pension is automatic, but to claim the 20-40% tax back, one must complete a tax return/self assessment. Am I mistaken in this belief?

Yes, I don't know where you have read that but it's wrong.

If you have to file a return for some other reason you have to include your relief at source (RAS)  contributions on the return.

But if you don't have to file a return then claiming tax relief on RAS contributions isn't a reason to need to file one.

Just follow the gov.uk process here.

https://www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments

Shickly

Dazed_and_C0nfused said:

Yes, I don't know where you have read that but it's wrong.

If you have to file a return for some other reason you have to include your relief at source (RAS)  contributions on the return.

But if you don't have to file a return then claiming tax relief on RAS contributions isn't a reason to need to file one.

Just follow the gov.uk process here.

https://www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments

That is all received. Thank you very much for your patience and explanations. I have learnt a great deal from your responses. Much appreciated.

Dazed_and_C0nfused

Shickly said:

Dazed_and_C0nfused said:

Yes, I don't know where you have read that but it's wrong.

If you have to file a return for some other reason you have to include your relief at source (RAS)  contributions on the return.

But if you don't have to file a return then claiming tax relief on RAS contributions isn't a reason to need to file one.

Just follow the gov.uk process here.

https://www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments

That is all received. Thank you very much for your patience and explanations. I have learnt a great deal from your responses. Much appreciated.

Don't forget that by the time you have your February payslip you should have a very good idea of what your taxable earnings will be for that tax year so there shouldn't be a problem knowing what to pay into a SIPP at that point.

Shickly

Dazed_and_C0nfused said:

Don't forget that by the time you have your February payslip you should have a very good idea of what your taxable earnings will be for that tax year so there shouldn't be a problem knowing what to pay into a SIPP at that point.

Thank you, you read my mind, that was the last obstacle I was wondering how to tackle, in terms of making the right deposit, and I had come to a similar conclusion as to leaving it as late as possible in the financial year to give it my best guess and remove the majority of the uncertainty. Very informative, your advice has been priceless.

In theory, considering we are paid on the 20th of each month, I could even wait until the 20th March could I not. And would have the exact figure.

Dazed_and_C0nfused

Shickly said:

Dazed_and_C0nfused said:

Don't forget that by the time you have your February payslip you should have a very good idea of what your taxable earnings will be for that tax year so there shouldn't be a problem knowing what to pay into a SIPP at that point.

Thank you, you read my mind, that was the last obstacle I was wondering how to tackle, in terms of making the right deposit, and I had come to a similar conclusion as to leaving it as late as possible in the financial year to give it my best guess and remove the majority of the uncertainty. Very informative, your advice has been priceless.

In theory, considering we are paid on the 20th of each month, I could even wait until the 20th March could I not. And would have the exact figure.

Yes, I would be surprised if any SIPP provider did not accept contributions until very close to 5 April each year.

But if you get it wrong there is no way to change things once past the end of the tax year.