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  • FIRST POST
    • Mr.Saver
    • By Mr.Saver 12th Aug 18, 8:40 PM
    • 54Posts
    • 11Thanks
    Mr.Saver
    Pention Tax Relief and Tax Self Assessment
    • #1
    • 12th Aug 18, 8:40 PM
    Pention Tax Relief and Tax Self Assessment 12th Aug 18 at 8:40 PM
    Background information:
    * I'm full-time employed, was expected to be a basic rate taxpayer.
    * I have used all my 20,000 ISA allowance.
    * I have savings outside tax wrapper, interest is not going to exceed 300.
    * I have accumulation unit OEICs invested outside tax wrapper, the combined growth are not going to exceed 500.
    * I have a workplace pension with 2% contributions from my employer and 3% from myself.
    * I'm planning to open an SIPP this year.

    Everything was that simple, no tax needed to be paid on my savings or investments, and the pension provider will automatically claim the 20% tax relief. But things are complicated (at least for me) when I received a bonus and pay raise recently, they have made me into the higher tax band for this tax year.

    My questions are:
    1, How can I claim the additional 20% tax relief for my pension contributions? Do I need to fill in a Self Assessment?
    2, Where will the tax relief to be paid into? Is it my bank account or my pension account?
    3, If the tax relief is to be paid into my pension account, what happens if I have an SIPP and a workplace pension? Can I choose which one it is paid into or is it based on my contribution amount in each pension?
    4, If I need to fill in a Self Assessment, what information will I need? I have never done this before. Do I need to separate the dividends and capital gains on my OEICs outside ISA? How can I do that if my investment platform doesn't do it for me?

    Thanks.
Page 1
    • Dazed and confused
    • By Dazed and confused 13th Aug 18, 7:01 AM
    • 2,990 Posts
    • 1,485 Thanks
    Dazed and confused
    • #2
    • 13th Aug 18, 7:01 AM
    • #2
    • 13th Aug 18, 7:01 AM
    Firstly you cannot claim an "additional 20% relief". The (gross) SIPP contribution increases the amount of basic rate tax you can pay, which in turn reduces the amount of higher rate tax payable. But this isn't guaranteed to be worth an extra 20%. You might pay say 5,000 gross into a pension but only be liable to higher rate tax on 3,000.

    1. Not usually. If you make very large payment (five figures gross?) then probably is necessary.

    2. Any extra tax relief due will come to you. If you tell HMRC early enough then through your wages via a higher tax code but if not then either a cheque or bank transfer after the end of the tax year.

    3. See 2.

    4. You have to declare all taxable income but sometimes gains can be omitted if your totals are within certain limits.
    • Mr.Saver
    • By Mr.Saver 13th Aug 18, 11:22 PM
    • 54 Posts
    • 11 Thanks
    Mr.Saver
    • #3
    • 13th Aug 18, 11:22 PM
    • #3
    • 13th Aug 18, 11:22 PM
    Thank you, Dazed and confused. You have me understand this better. I'm sorry for asking more questions related to this topic.

    I'm only planning to pay about 8,000 gross into my pension this year. Based on your estimate, I think I will unlikely need to fill in the Self Assessment. Therefore, I don't need to worry about my OEIC gains for this tax year anymore. But I will make sure that I sell them before the end of the tax year, and replace them with the Income version instead, just in case if I ever need to fill in the SA in the future.

    You said "But this isn't guaranteed to be worth an extra 20%". In my understanding, this could only happen if in a given tax year, the gross income minus gross pension contributions ends up below the 40% higher rate tax band. In your example: "You might pay say 5,000 gross into a pension but only be liable to higher rate tax on 3,000", it would mean that I have 49,350 (46,350 + 3,000) gross income in the 2018/19 tax year (assume tax code is 1185L). Am I right? If not, where can I find the information about how is the pension tax relief calculated? E.g.: How do I find out (or estimate) how much tax relief will I get if I pay a certain amount into my pension this year?

    Assume that I get full 20% tax relief on my entire pension contributions, if I pay 6,000 gross into my pension this tax year, without tax code adjustment, I would have overpaid 960 tax (6,000 gross * 80% = 4,800 net, and 20% tax on 4,800 is 960), therefore my tax code should change from 1185L to 1425L, which adds 2,400 personal allowance that I don't need to pay tax on, and this would have deducted exactly 960 tax from my income (2,400 * 40% = 960). Right?
    • Dazed and confused
    • By Dazed and confused 14th Aug 18, 8:40 AM
    • 2,990 Posts
    • 1,485 Thanks
    Dazed and confused
    • #4
    • 14th Aug 18, 8:40 AM
    • #4
    • 14th Aug 18, 8:40 AM
    You don't get a specific pension tax relief, your overall tax liability for the year is just calculated slightly differently.

    The basic rate band is increased by the gross amount contributed. Which would, if your income is high enough, reduce the amount of tax payable at higher rates.

    This means you are highly unlikely to see exactly to the penny a 20% benefit because pension tax relief (for you the individual) doesn't work like that.

    If you have very straightforward tax affairs and are paying a (gross) pension amount which is all going to reduce the higher rate tax due then it may be very close to 20% but the overall calculation will still take into account any other tax you owe, for example most on PAYE owe small amounts each year which are usually ignored but they are taken into account if HMRC need to send you a tax calculation.

    You have also misunderstood how the tax relief is calculated. If you pay 4,800 over to the pension company they will add basic rate tax relief so the amount in the fund is 6,000.

    Your basic rate limit is increased by 6,000 so if you have paid sufficient 40% tax this could be worth 1,200 saving in personal tax to you (before any other tax owed or refund due is taken into account)

    6,000 x 40% = 2,400
    6,000 x 20% = 1,200
    Difference. = 1,200

    If you have very simple tax affairs and your taxable salary was high enough to get full higher rate tax relief then the new tax code would be 1485L (additional 3,000 tax free amount in tax code (which isn't extra "Personal Allowance") saves 1,200 in tax).
    • Mr.Saver
    • By Mr.Saver 14th Aug 18, 8:49 PM
    • 54 Posts
    • 11 Thanks
    Mr.Saver
    • #5
    • 14th Aug 18, 8:49 PM
    • #5
    • 14th Aug 18, 8:49 PM
    Thanks again. I understand it better now.
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