Pension and higher-rate tax relief

"SW" wrote

Looks correct to me :-

You actually have *Gross* contributions of 2,400pa. Hence you should, as a HRT, pay net conts of 1,440pa on this - with tax relief of 960. [You are getting 528 relief "at source" and so should get the extra 432 relief in your SA.]

What you are *not* doing is paying gross contributions of 3,120 - which you appear to be assuming above. :-(

If your salary were (say) 40Kpa, then 2,400 conts is 6% of salary (3,120 would be 7.8% of salary). Do you know what contribution rate you are meant to be paying?

I have given this a cursory glance and have to say I can't find fault with it.

Is your company operating a Net Pay scheme? If so, your tax relief should be given via PAYE. If not, the additional 18% needs to be claimed via your SA Return - i.e. 432, assuming gross payments of 2400 @18%.

I concur with Tim's answer. If you want to achieve a gross contribution of £3120pa, you need to make a net contribution of £202.80pm (£2433.60pa) which will get the automatic top-up at basic rate of £686.40 and you will then get a refund of £561.60, being £2433.60-0.6*£3120.

This is handled in exactly the same way as Gift Aid. You make a net donation to your charity of £7.80, the charity reclaims £2.20 from the IR so has £10 to work with. If you're a standard rate taxpayer, that's the end of it. If you're a higher rate taxpayer, you get a refund of £1.80, making your effective net donation £6.

The reason you get a refund (thus ensuring you pay £6 for the charity's £10) instead of the charity getting an extra £3 (£7.80 being 60% of £13) is because the charity's admin is very much simplified, and it doesn't need to know at what rate you pay tax. As far as the charity is concerned (and by extension the pension fund management company) everyone is a standard rate taxpayer. The IR's admin in processing charity and pension company claims is also simplified.

The reason the "refund" is given by widening your standard rate band is because that is a very clever way of making sure you get the right size of refund even if the aggregate of all your charitable donations and pension contributions is such that part of it is above, and part below the higher rate threshold.

"Gareth Kitchener" wrote

How many personal pension providers take money directly out of policyholder's paypackets, before their "take-home" pay? I thought PP premiums were usually paid eg by Direct Debit (or equivalent) ...

Actually quite a lot: probably the vast majority of GPPs. Part of the requirements for employer-designated Stakeholder schemes is that the employer makes that facility available.

(BTW the reason I made the point about assuming it was a PP was that tax relief on occupational schemes is handled totally differently, with the gross contribution being deducted before tax.)

"Gareth Kitchener" wrote

Ah, good old GPP's. Where would we be without them! [I always seem to think of them more as an employer scheme than the middle "P" suggests!]

Group Personal Pension Schemes for example.

In that case, it's exactly as I (and others) said earlier:

Gross contribution = £2400.

Net cost to you after 40% tax relief should be: £2400 x 0.6 = £1440.

Contribution to pension provider is net of tax relief at 22%: £2400 x 0.78 = £1872.

Difference in tax relief to be claimed via your tax return: £1872 - £1440 = £432.

This is in respect of *your* contribution. The employer contribution is paid gross and is deducted as an expense from the company profits before Corporation Tax is calculated.