Tax relief on personal pension contributions

[bogwoppit]

I have a quick question about the above. Basically in a few years I will have a pot of cash to do with what I please. My current intention is to whack it into a pension. I understand that the pension administrators will immediately reclaim the tax upto the basic rate, and I can claim the remainder at the higher rate (assuming I am in that bracket) via my tax return.

The question is, how is this calculation made? That is, to determine the proportion of the lump sum that falls within the higher rate tax band.

For example using today's rates, let's say at the end of tax year 2009-2010 I have earned £50k gross, and put £30k into a personal pension. £7500 is automatically added, and I claim for the remainder. Do I get an additional £12500 (i.e. applying 40% to the full amount), or less than that (only 40% on my income above the higher rate threshold)? It seems as though option 1 is a good deal, whereas option 2 makes an assumption that the lump sum was earned in the same year.

[Eric Mc]

All of it will be eligible for higher rate relief.

However, there is a strong lobby within the Labour party and Cabinet who want this higher rate relief abolished.

Another nail in the coffin of the pension industry administered by Labour.

[bogwoppit]

So in theory good news, but I guess I'd better not plan for it to be there by the time I get the cash. The problem is it's not really appropriate to compensate by making the contributions now because I don't have a "normal" tax status and therefore am not guaranteed to get any tax relief beyond the basic 20% on £2880/yr. HMRC can't decide whether I am to be treated as a tax payer, it seems to depend on whether it's a liability or a rebate we're talking about (I think you can guess which way the decision goes in each situation). Is a bit frustrating considering I also pay more tax than I would do otherwise, but that's life!

[Eric Mc]

I knew that. It's just that the actual way these reliefs work is sometimes really odd and difficult to explain.

By increasing your basic rate band you remove from the higher rate band some income that would otherwise have been taxed at the higher rate.

[rfisher]

Slightly OT but;

If you pay AVCs on a PAYE scheme and you're on 40% tax, is the tax relief automatically credited to your pension, or do you need to do that yourself in a tax return?

[Eric Mc]

You MIGHT need to do it yourself on a Tax Return. Sometimes, if you made the Revenue aware of what was happening in the past, they could be automatically adjusting for it in your PAYE tax coding. The best thing is to check your coding notice and, if there is no obvious adjustment showing, phone your tax office and ask them what the best way to deal with it is.

They might be willing to make adjustments for you based on information you give them over the phone.

[rfisher]

What about 'added years' contributions?

Do they get tax relief at source or do you need to claim the tax back?

[bogwoppit]

Eric Mc said:

I knew that. It's just that the actual way these reliefs work is sometimes really odd and difficult to explain.

By increasing your basic rate band you remove from the higher rate band some income that would otherwise have been taxed at the higher rate.

Wait, I'm now confused! Are you now saying that you only get the extra tax back on the part of your contribution that was above the higher rate threshold? Or are you just talking about future government plans?

[Eric Mc]

The first.

[bogwoppit]

OK, so HMRC effectively assume that all the income was earned during the same tax year you make the pension contribution. Bah.

[notacharles]

you also need to be careful about anti forestalling. basically they're going to reduce tax relief on pension contributions for those on over £150k next year. to stop folk stuffing money into pension now to still get their 40% before the change they're going to limit to £20k (£30k in some cases) with some rules about if this is regular planned saving. Worth seeking professional advice.

shame really as 10 million people in uk don't save at all, closure of defined benefit plans means we're all going to have to save more yet gov isn't encouraging.