Backdated pension contributions

kevj9201

Hi, hoping someone can answer my question.

Following the winning of an age discrimination lawsuit I now owe £5000 in the contribution difference between what I should have paid and what I actually paid over a 7 year period! Obviously I’m entitled to tax deduction from the years I would have paid it so I need to pay £4000. 

I’m paying it all in this tax year. So if it was salary sacrificed it would reduce my income on my p60 and if I paid it into my private pension I would put it on my tax return and would increase the 20% tax bracket by £5000 and I’d get an adjustment next year as it would have been taxed at 40% (in this tax year that I’m paying it). 

Is it right that I can claim neither of these “relief's” or am I missing something? 

Thanks and if you require any further info / clarification to answer please ask? 

Marcon

kevj9201 said:

Hi, hoping someone can answer my question.

Following the winning of an age discrimination lawsuit I now owe £5000 in the contribution difference between what I should have paid and what I actually paid over a 7 year period! Obviously I’m entitled to tax deduction from the years I would have paid it so I need to pay £4000. 

I’m paying it all in this tax year. So if it was salary sacrificed it would reduce my income on my p60 and if I paid it into my private pension I would put it on my tax return and would increase the 20% tax bracket by £5000 and I’d get an adjustment next year as it would have been taxed at 40% (in this tax year that I’m paying it). 

Is it right that I can claim neither of these “relief's” or am I missing something? 

Thanks and if you require any further info / clarification to answer please ask? 

Is this a defined benefit or a defined contribution scheme?

What has the scheme said to you in terms of how and when payment is to be made, and what has your employer said in respect of the options open to you?

kevj9201

It’s a DB scheme and it needs to be paid in a one off payment, at anytime before retirement but with compound interest added! 

It’s just that I’m paying it all in one tax year and not getting any of the additional tax benefits that I would if I paid it salary sacrifice or into my private pension! 

Marcon

kevj9201 said:

Hi, hoping someone can answer my question.

Following the winning of an age discrimination lawsuit I now owe £5000 in the contribution difference between what I should have paid and what I actually paid over a 7 year period! Obviously I’m entitled to tax deduction from the years I would have paid it so I need to pay £4000. 

I think this is where the confusion (and disappointment!) has crept in, unless I've really misunderstood what's going on here. If you owe £5,000 then you need to pay the scheme £5,000 (or more accurately the scheme needs to receive £5,000). Tax relief might be between you and HMRC, but let me dig a bit deeper.

If this is a DB scheme, I'd expect contributions to be made using the 'net pay' method - a confusing bit of terminology if ever there was one. Net pay means your pension contributions are deducted from your gross pay, giving you immediate tax relief at your highest rate of tax. Alternatively, they could be paid by salary sacrifice - and from your opening post, I suspect that's what has been happening?

Are you still working for the sponsoring employer of the DB scheme?

kevj9201

Yeah I’m still working for them. I pay from my salary monthly into the DB pension, but they want the backdated contributions in 1 lump sum payment not to be taken from my salary!

 My salary is all taxed at 20% but I go over into 40% with other income. 

Marcon

OK, they want to keep their lives simple. Probably not worth arguing about.

So you pay the scheme £5,000 (ask for the relevant bank details) and then claim tax relief direct from HMRC.

If you do self assessment tax returns, which your first post suggests you do, you have to claim that way. If not, you can do it online: https://www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments

Either way, you'll get higher rate tax relief on this £5K contribution if you have at least £5K of income in this tax year in the 40% tax bracket.