A client has taxable income of approximately £60,000 of which £2000 is savings income. A personal pension contribution of £27,215 (gross) was paid to eliminate the higher rate liability for 2000/01. As the contribution was paid under deduction of basic rate tax (22%), we were anticipating a refund of 18%. However, the actual refund was higher than this. The reason? As relief is given by extending the basic rate band, any relief which results in savings income no longer being taxed at higher rates, reduces the rate to 20%, ie an additional 20% relief.
This seems to be correct according to the legislation. Has anyone else come accross this in practice or had it queried by the Inland Revenue?