I have a client who has PAYE earnings circa £12,000 and he pays into an employers pension scheme from which he gets tax relief at basic rate as his tax code is 1150L. However he has self employment earnings for that year of £72,000 which puts him firmly in the higher rate tax band. According to Tax Calc, it specifically says not to include pension payments made to your employers pensions scheme deducted from gross pay as maximum tax relief will already have been claimed. This would be fine if all his income was from PAYE as it would give him the appropriate tax relief, but in this instance his tax relief through his salary would be only at 20%. Any thoughts? Is Tax Calc wording wrong?
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Are his pension contributions deducted net of tax, or are they deducted gross from his pay before the tax is calculated?
Gross, before his tax calculated. Thus at best he is only going to get 20% tax relief. If his earnings were to drop below £11,500 after his pension deductions he wouldnt get any tax relief at all on his part of the pension contribution.
Please explain rather than just saying my interpretation is wrong. How can he get 40% tax relief on his pension contributions (to which he should be entitled) if he isnt paying 40% tax via his PAYE and the contributions are ignored on his tax return?
Because they have been deducted from his gross pay & it is only the figure after that deduction that goes onto the tax return and is used to work out his overall taxable income.
Don't forget that as you're reporting the post-contribution salary on the tax return, you will also move more of the SE profits into the basic rate band. The same principle would apply if you had a salary below £11,500, as you'd then move some of the SE profits into the personal allowance.
There is no tax relief since no tax was suffered if the pension was deducted from gross pay.