Tax coding & additional pension contributions

Tax coding & additional pension contributions

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CaptainSlow

Original Poster:

13,179 posts

211 months

Sunday 29th March 2015
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Quick question on additional pension contributions and changes in tax coding. Assuming higher rate tax payer.

If an additional payment of £16,000 was paid, am I correct in thinking that the pension fund would claim the standard tax credit of £4,000 and the tax coding would increase by £12,500 (£20,000 * 1.25/5)/.4? Doesn't seem quite right to me.

Ginge R

4,761 posts

218 months

Sunday 29th March 2015
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Higher rate taxpayers detail the contribution in their self assessment, HMRC adjusts tax code accordingly (by the appropriate extra amount entitled to). The extra amount claimed varies don't forget (depending on individual's salary).

CaptainSlow

Original Poster:

13,179 posts

211 months

Monday 30th March 2015
quotequote all
OK thanks, but assuming all relief is at 40%, do you know that coding change amount?

Eric Mc

121,779 posts

264 months

Monday 30th March 2015
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And is the coding adjustment being made in the current tax year reflective of the current tax year's pension contribution or some previous year's contribution?

PAYE coding adjustments are often one year (at least) out of date.

CaptainSlow

Original Poster:

13,179 posts

211 months

Monday 30th March 2015
quotequote all
Thanks Eric...assume current year for simplicity.

Eric Mc

121,779 posts

264 months

Monday 30th March 2015
quotequote all
May be a wrong assumption.

I am not a big fan of tax reliefs being adjusted for through tax codings. I actually think that if you are a higher rate taxpayer and make pension contributions and other tax relievable payments - such as charitable donations - then there is a good case for volunteering to submit a self assessment tax return each year - and stop HMRC from playing havoc with your codes.

CaptainSlow

Original Poster:

13,179 posts

211 months

Monday 30th March 2015
quotequote all
OK thanks.

Anyone know the answer?

Sheepshanks

32,530 posts

118 months

Monday 30th March 2015
quotequote all
CaptainSlow said:
If an additional payment of £16,000 was paid, am I correct in thinking that the pension fund would claim the standard tax credit of £4,000 and the tax coding would increase by £12,500 (£20,000 * 1.25/5)/.4? Doesn't seem quite right to me.
I don't 100% understand this, but haven't you multiplied by 1.25 too many times?

The way I see it, the sum at the end should be (£16,000 * 1.25/5)/.4 which equals £10,000.

CaptainSlow

Original Poster:

13,179 posts

211 months

Monday 30th March 2015
quotequote all
Yes, seems strange to me, however, this is the guidance on a tax forum. I think you're correct though it should be £10,000.

Edited by CaptainSlow on Monday 30th March 11:49

Sheepshanks

32,530 posts

118 months

Monday 30th March 2015
quotequote all
CaptainSlow said:
Yes, seems strange to me, however, this is the guidance on a tax forum.
Yes, but does it start with the actual amount you paid (ie £16K)? It would be odd to start a calculation with another calculated amount.

Zigster

1,636 posts

143 months

Monday 30th March 2015
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I think the best way to look at it is to consider gross and net amounts.

If you pay £16k out of net salary to a personal pension, the pension provider grosses it up to allow for basic rate tax – so you have effectively paid £20k into the pension.

As a 40% tax payer, that £20k gross should only have cost you £12k net. So you are owed a further £4k (i.e. £16k-£12k) of tax relief. This £4k should be reclaimed by you one way or another – you can get your tax code adjusted but I prefer Eric Mc’s approach of doing a tax return.

If your tax code is adjusted, it needs to claim back £4k based on 40% tax. So I would expect you to have an additional adjustment on your tax code of £6,667. That is, if you earn £6,667 gross you would receive £4k net – and it is £4k which you are effectively owed.

Ginge R

4,761 posts

218 months

Monday 30th March 2015
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Don't forget, you need to be paying enough tax at your higher/top marginal rate to justify any 40% or 45% rate tax relief.

So, if you made a gross contribution of £40,000 into your pension, and if you got paid £65,000, you'd get the 40% tax relief on large amount that blasts straight into the higher bracket. In other words, as a 40% higher rate tax payer exploiting your benefits to the max, you could claim back up to an extra £4,627 in your end of year self assessment as 40% relief, so your 40k could cost you somewhere in the region of £27,373.

But if you 'only' got paid £45000, in other words, as a 40% higher rate tax payer who pays less, you can only claim an extra £627.00 because that represents the smaller fillet of your contribution that can be matched by your smaller intrusion into the 40% bracket.

So, your contribution in that instance costs you a little more because you can claim less, in other words, it costs you £31,373 compared to £27,373 for the person who gets paid £20,000 more. The rule of thumb is, if you don't pay the tax, you can't claim the relief. You can't double up either; ie; max out a pension contribution and then make the same payment into something like a VCT and expect tax relief on that too.

Sheepshanks

32,530 posts

118 months

Monday 30th March 2015
quotequote all
Zigster said:
If your tax code is adjusted, it needs to claim back £4k based on 40% tax. So I would expect you to have an additional adjustment on your tax code of £6,667. That is, if you earn £6,667 gross you would receive £4k net – and it is £4k which you are effectively owed.
I can't get my head around what you're thinking there? If the OP was on the full standard 1000 (£10,000) tax code then to pay £4K less tax his tax code would need to change to 2000 (£20,000).

oop north

1,592 posts

127 months

Wednesday 1st April 2015
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I think the £10,000 increase is correct (though agree with Eric there is next to no chance HMRC will get the code right - in one year I had about six or seven entries on mine, all of which were incorrect but by a fluke the end result was roughly OK) - £16k net contribution, pension fund claims 20/80ths or £4k to bring up to £20k gross.

Then you need to get back £4k tax relief (assuming contribution doesn't bring you below 40% threshold) so if paying tax at 40% you need an extra £10k allowance to get £4k back

The £6,667 is confused and wrong smile

Zigster

1,636 posts

143 months

Thursday 2nd April 2015
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oop north said:
The £6,667 is confused and wrong smile
Yeah - sorry! smile

I got my 40% and 60% the wrong way around. I agree - should be £10k extra tax allowance to get the additional £4k of tax relief through the tax code.

sumo69

2,164 posts

219 months

Thursday 2nd April 2015
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Zigster - hang your head in shame!

Assuming after the coding adjustment the OP is still paying at higher rate, the answer is a £10000 increase, so assuming a standard 1000L code (soon to be 1060L), the code would become 2000L (2060L for 15/16).

David