Self assessment versus PAYE mechanism

Self assessment versus PAYE mechanism for pension contributions

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client is in self-assessment perhaps historic reasons but they do have currently loss making investment property.

only taxable income is £70,000 PAYE income

Employees workplace pension is flat uncapped/banded 5% of gross - but here's the thing:

the ees contribution is paid net of 20% BR tax relief and deducted from net pay

how would the tax payer get relief for the ees pension contribution if not in SA?

conversely if not in SA and HMRC incorrectly over "code out" pension contribution how is the underpayment of tax ever coming to light ?

Replies (14)

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By John R
16th Dec 2021 16:43

There must be thousands of higher rate taxpayers in this situation who do not realise they are not getting the tax relief to which they are entitled. If not in self-assessment, call or write to HMRC. See here https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief.

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Replying to John R:
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By nick farrow
16th Dec 2021 17:46

thanks R i agree

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Replying to John R:
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By Matrix
16th Dec 2021 19:29

Agreed. Just did a return for someone who had a gain to declare but if she hadn’t been in self-assessment the higher rate tax relief would have been missed. Monthly e’ee contribution is £525.

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Replying to Matrix:
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By Not Anonymous
16th Dec 2021 22:42

Matrix wrote:

Agreed. Just did a return for someone who had a gain to declare but if she hadn’t been in self-assessment the higher rate tax relief would have been missed. Monthly e’ee contribution is £525.

Sometimes people have to take a bit of personal responsibility.

There is masses of information on the t'internet about higher rate tax relief on "relief at source" contributions and most companies accepting the contributions give plenty of information about this.

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Replying to Not Anonymous:
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By Hugo Fair
16th Dec 2021 23:22

Quite.
And, although there may be reasons that we don't know, why would anyone who is a higher-rate taxpayer opt to join a 'relief at source' pension scheme?

They are generally appropriate for the very low-paid (including those who don't pay even basic rate tax); whereas a 'net pay' pension scheme would give the HRT employee an immediate reduction in tax taken (and an improved contribution to the scheme).

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Replying to Hugo Fair:
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By Paul Crowley
16th Dec 2021 23:48

Auto enrolment is the reason with employer deciding on a firm wide scheme
Not unreasonable to pick the basis most favourable for the pooorly paid over the higher rate
The later usually informed and capable of getting the extra relief

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Replying to Hugo Fair:
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By Not Anonymous
16th Dec 2021 23:52

Well for plenty it will really have been their employers choice, most auto enrollment schemes are relief at source.

And if it involves extra contributions then these are nearly always relief at source.

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Replying to Hugo Fair:
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By Matrix
17th Dec 2021 07:48

Do you mean they should opt out?!

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Replying to Matrix:
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By Hugo Fair
17th Dec 2021 13:06

No, certainly not (or at least not for any reason disclosed within this thread).

But *someone* has chosen the Pension Scheme(s) being offered to employees (presumably although not stated under AE) ... and there are two types of such schemes. [Some of the schemes offer both types so that the employee can choose the most appropriate version for her/his circumstances].

I take the point raised by others that neither type of scheme is universally 'better' ... but if this employee has any choice then he/she would find life simpler if they chose the other type.

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Replying to Hugo Fair:
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By richard thomas
17th Dec 2021 17:17

The middle para is a bit odd if my reading of s 191 FA 2004 is right, as subsection (2)(c) suggests that a net pay scheme is only available if applied to all employees.

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Replying to richard thomas:
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By Hugo Fair
17th Dec 2021 18:33

I presume you actually meant subsection (3)(c)?

... where relief in respect of contributions under a pension scheme .. may .. be given in accordance with section 193 .. if— ..
(c)relief in respect of contributions made under the pension scheme by all of the other members of the pension scheme who are employees of the sponsoring employer is given in accordance with that section.

As I read it that restriction does not require the net pay scheme to be "applied to all employees" - but to "all of the other members of the pension scheme who are employees" (i.e. the subset of employees who are members of that scheme)?
In plain English, you can't apply the different 'types' of contribution within a single scheme.

This is why the scheme providers to whom I referred insist on having two separate but identical schemes (one operating one type of contribution and the other the other type) ... but, both being their schemes, they have control of the operating rules and have chosen to make any transfer between these two schemes seamless (i.e. without administrative effort or cost usually associated with transferring from one scheme to another).

Some of the providers have even 'hidden' the difference between their two schemes by simply allowing the employer to offer a (single) AE scheme - and then letting each individual employee (i.e. new member) choose which of the two 'types' of contribution suits that person.

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Replying to Hugo Fair:
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By richard thomas
17th Dec 2021 18:59

Yes I did mean (3)(c). I'm sure you are right about it: I was offering a fairly qualified opinion on the matter.

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Replying to Not Anonymous:
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By Matrix
17th Dec 2021 07:48

There may be information online or sent by the scheme but, in my experience, no higher paid clients have any knowledge of the pension taper or higher rate tax relief.

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Replying to Matrix:
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By Not Anonymous
17th Dec 2021 09:40

Maybe it's time personal finance, tax etc formed (a small) part of the curriculum??

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