Peter
It's v simple. If your IFA does not understand, change him.
You make the contribution net of of basic rate tax. ie 100 gross pension contribution, you actually pay 78.
Your basic rate tax band (the taxable income between 2021 and 31400) is extended by the gross pension contibution. This means that you pay less higher rate tax, and makes the maths right.
Peter Taylor FIFP, CFP
Original message I think I am misunderstanding this somewhere along the way, but my IFA has been unable to explain this to me by email, so I thought I would try here. (Numbers are illustrative only.)
Higher rate tax payer wants to make a GBP 100 *gross* payment into his private pension scheme. Employer calculates what that contribution is
*net* of *basic* rate tax (GBP 78) and deducts it from salary *net* of *higher* rate tax.The GBP 78 goes to the pension fund which automatically gets back the BRT, making the contribution back up to GBP 100. The tax payer then applies for the other 18% back.
*Where* does the 18% go? I have been told (at least) two different things. The first was that the 18% doesn't actually go into the pension, but your tax code is adjusted so that you end up only effectively paying BRT on the contribution. This makes all the numbers seem right.The second explanation was that the money *does* go to the pension. This seems more sensible, but that makes the numbers wrong because then the GBP 100 after the refund of the BRT is equivalent to GBP 130 after the refund of the HRT (100x0.78 == 78 == 130x0.6), so effectively the *gross* contribution is GBP 130 instead of GBP 100.
My IFA either doesn't understand my point or doesn't grok mathematics, but thinks this perfectly sensible. The company accountants are quite happy with making the GBP 78 deduction too.
Can my employer not make a gross deduction to pay to the pension company which would neatly bypass this problem entirely!
Can anyone spot what I am misunderstanding?
Cheers,
Peter