Anyone Else Pay Into A SIPP / Pension And Have This Problem?

[libspero]

Quick question to the forum about pension contributions, because I guess there are probably several of us here who do this.

Have any of you ever questioned you calculation from HMRC ?

My understanding is that pension contributions are 100% deductible, so,  if you put in £6000 of post tax higher rate income (equivalent to £10000 of pretax income) you should get total tax relief of £4000.

However, (according to my tax calculation) it is not calculated like this.

 

As a hypothetical example of how it seems to work:

On a £6000 contribution you get £1,500 back through your SIPP/ Pension provider  (correct for basic rate tax,  6000 / 0.8 = 7500)

So as a higher rate tax payer you should still expect to see a further £2500 back  (£6000 / 0.6 = £4000,  less £1500).

Instead (in my case) they raise your 20% tax band by the value of your net tax contribution,  in the above example,   £6000 (= tax deduction of 6000 x 0.2 = £1200).

I questioned this with HMRC and they said it was an error and they should have increased it by £7500, not £6000 to match the £1500 already deducted by my pension provider.

However,  I still can't work out how this is correct.  £1500 + £1500 = £3000,   Not £4000 which is the correct total amount.

 

Has anyone else run into this issue,  or understand why the figures don't add up ?

I know the first comment will be to see a tax adviser.   I plan to do this.  But first I wanted to see if anyone else had come across this same issue and to sanity check my calculations to make sure I'm not guilty of some silly school boy error.

 

[InlikeFlynn]

I think I can see something wrong with your figures.

You say

"On a £6000 contribution you get £1,500 back through your SIPP/ Pension provider  (correct for basic rate tax,  6000 / 0.8 = 7500) "

This is correct, and should happen through your SIPP provider and will appear in your pension. 

The rest should come back to you as cash through your tax return, so in your case you get £1500 back in cash.

Here's where your calculation went off the rails:

You now have £7500 in your pension for which you have actually paid £6000 (initial contribution) less £1500 (rebate through tax return).  So you have paid £4500 for £7500 of pension.  This is correct, as 4500/7500 = 0.6.

Hope this clarifies things - it's a ridiculously complex system!

One of the most common issues with claims for pension contributions through self-assessment is that it easy to give the wrong figure in the form.  HMRC request the gross figure (ie including the 20% rebate applied by the SIPP provider -which in your example would be £7500).  Could this explain your shortfall?

 

 

 

[libspero]

Thanks ILF,

I had to run through that a couple of times before I could get my head around it,  but actually that does make perfect sense.

Appreciate you taking the time to show me the error of my ways.. 

[libspero]

In answer to your second point,  yes,  that was the reason their original value was wrong.  I rang HMRC and told them how much I had paid in to my pension. I didn't tell them (and they didn't ask) if that included the automatic rebate from the provider..  which as you point out,  it didn't. 

I'm sure a lot of people get caught out by that.