I am preparing a tax return for an individual who is an employee of a company and receives rental income.
He is in his employers pension scheme whereby he gets his pension contributions deducted from his gross pay. He also pays into his own personal pension plan separately.
His earnings from employment are within the basic rate band for tax, but when you include his rental profits on his tax return, he becomes a higher rate taxpayer.
His argument is that he is receiving tax relief on the pension contributions deducted from his salary at basic rate, but he has been told that he can claim the extra tax 20% relief (as he is in fact a higher rate taxpayer) via his tax return.
I don't believe he can claim the extra relief on these payments and there does not appear to be a box on the tax return allowing him to claim this.
I only include the contributions he makes to his own Personal Pension Plan on the tax return
Am I correct or is there something I am missing.
Any advice would be gratefully received.
Replies (15)
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Pension claim cannot exceed his total earnings in the tax year. Calculation for the purpose of Tax will involve the following:
Contribution made through employer will be directly deducted from the Gross salary.
Personal contribution to be grossed up and thereby the BR will increase by the grossed up amount
If the total income falls within the BR the personal contribution will not make any difference.
If the deductions are from his gross pay then the company is using the 'net pay' arrangement so full tax relief has already been given.
Is there any reason why he thinks he has not obtained full relief?
Not totally sure I understand the question and, for the sake of argument, I'll assume there is no question that the pensions contributions are eligible for tax relief in full.
The tax liability for the year is, presumably, calcluated on the total taxable income, including salary, less (gross) pension contributions. If that is below the threshold for HRT, then there is surely no HRT?
Put it another way, start with his salary (net of pension contributions) and add the rental income. If that puts the client below the HRT threshold, there's no HRT.
My apologies I didn't read the OP closely enough.
See here
http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM05201060.htm
For convenience, HMRC will often code out estimated investment income (including rental income). If that was the case, then relief for HRT would be happening by the operation of PAYE.
I don't believe he can claim the extra relief on these payments and there does not appear to be a box on the tax return allowing him to claim this.
I only include the contributions he makes to his own Personal Pension Plan on the tax return
http://www.hmrc.gov.uk/worksheets/sa102-notes.pdf
"The box 1 figure is the pay figure after any contributions to your employer’s pension scheme (sometimes described as superannuation). Take care when copying this figure from your P60 to the Employment page."
What pay figure are you including?
If the pension has been deducted from gross pay
Then you can give effect to the higher rate tax relief by deducting them from his total income.
Before you do that though, you will need to adjust his taxable income to the amount that it would have been before the pension contributions were deducted from it.
You do need to ensure though that the reason that they were deducted from gross pay is because they are actually employer contributions under a salary sacrifice arrangement.
It seems very simple to me
Based on the OP's comments and assuming the employer is operating the pension arrangement correctly the contributions made are not employer's contributions. If they are deducted from the employees gross pay then it is a net pay arrangement.
Note no releif from NI is allowed in this situation. By contrast a salary sacrifice will affect NI ocntributions. Therefore by looking at the calculation of NI on a payslip you should be able to easily establish whether it is a net pay arrangement or salary sacrifice. As I've said already on the basis of information supplied it is a net pay arrangement.
As to the question of higher rate relief - that's something and nothing. The example below illustrates that the OP's client is getting HR relief at source assuming he's liable to HR.
Earning before pension deduction - say £32,000
Rental income say £12,000
Less allowances given in tax code £10,000
Taxable £34,000
Amount (2014/15) liable at BR £31,860
Amount liable at HR £ 2,140
But where pension contributions are deducted from gross pay the earnings for tax are reduced correspondingly meaning they won't show up as income on his P60 and so won't be included on his tax return, in other words they have reduced his taxable income. Say the pension contributions were £4,000 then the position looks like this:
Earnings appearing on P60 £28,000
Rental income £ 12,000
Less allowances given in code £ 10,000
Taxable £ 30,000
Amount at BR £30,000
QED - the taxpayer has received tax relief at HR on £2,140 and at BR on £1,860.
No entry on tax return is needed for contributions via employer. I've ignored the personal contributions as relief is allowed in the normal way against taxable income. They should of course be reported on the taxpayers return regardless of whether he is liable to HR or not.
A similar query
I was asked about relief for pension payments made through an employer's scheme this week and have a similar query with which I should be grateful for assistance.
A Big 4 accountants had prepared the return last year and claimed HR tax relief on the employee's contributions on their personal tax return. They are HR taxpayer.
The employee went back to them and asked why - the Big 4 firm said this is because only BR tax relief has been relieved by the employer's scheme, so HR has to be claimed through tax return.
I usually only include contributions to PPPs - per above I assume the contributions re deducted from gross pay - anyone know when you would include employee pension?
overcomplicating matters
@ minnie136
I'm not sure I understand your question and so I'll reply by covering what I think is relevant.
In essence if the pension contributions are deducted from an employees gross pay tax relief will effectively have been allowed at source at their marginal rate. No entry on tax return needed. End of story.
If contribution is deducted from net pay, as might be the case for premiums to a group PPP, it will be the type of policy where tax relief is given at source at BR. An entry on tax return is required and any HR relief given that way.
Thanks for any help
The Big 4 accountants claimed HR tax relief on the pension contributions to the employer's scheme. Therefore I assume they had seen payslips showing that the contributions were taken from net pay.
I have not seen payslips, it is a general question from a non-client.
My question is whether you have seen employee contributions to an employer's scheme being deducted from net pay and the HR relief claimed on the SA return in the same way as contributions to a PPP.
I suppose I am saying that I would not usually include payments to an employer's scheme on the SA return but assume it has been done correctly since it is Big 4 and they prepare many employees' SA returns for this company.
most definitely
It's common for employee net contributions to be deducted from net pay. Group Personal Pensions work that way Many Auto-enrolment pensions will be provided in a similar way . And yes! I've seen it in practice many times, not least in my own pay packet.
SA return
If it is common then why does the SA return only refer to PPPs? Do you put the employee scheme contributions in the box for contributions to PPPs although it says to exclude employer schemes?
I assume so since no other box.
It doesn't
@ minnie136
The tax return refers to "registered persons" not personal pensions. So it also covers free-standing AVCs.
Just because contributions are paid via an employer doesn't make it an employer's pension scheme (occupational scheme). A Group Personal Pension is not an occupational scheme it is a collection of personal pensions for employees with a single label (the employers name) stuck on it. Therefore contributions receive relief at source as with personal pensions taken out by an individual.
A free-standing AVC will also receive relief at source because it is a separate arrangement (a personal one) from the occupational scheme run by the employer.
Where an employee pays into a registered pension, which is not an occupational scheme, but which contributions are collected by the employer, and paid to the pension company they must be deducted from net pay to avoid tax relief being given twice, once at source and secondly via their pay packet. That means any higher rate relief must be claimed separately.