Tax coding & additional pension contributions
Discussion
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.
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.
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.
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 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.
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.
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.
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.
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.
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).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
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
Gassing Station | Finance | Top of Page | What's New | My Stuff