Calculating and claiming higher rate tax relief

Mark Underdown, The Nomad Paraplanner

10 April 2018

“Larger pension contributions are becoming more frequent for those that are higher rate taxpayers”

As pensions now have greater flexibility for access, and are more attractive from a tax perspective, larger pension contributions are becoming more frequent for those that are higher rate taxpayers.

This article will therefore provide an overview of how higher rate tax relief is calculated and how it is claimed.

TOP TIP: Higher rate tax relief is provided on pension contributions for earnings that are taxable at the higher rate.

Let’s look at an example to show how this is calculated.

Say a client earns £60,000 pa and wishes to make a gross single personal pension contribution of £20,000 in the 2016/17-tax year.

The full £20,000 will not obtain the higher rate tax relief at 40%.

First we need to calculate how much of the client’s income is in the higher rate band. I’m sure many of you can do this quickly, however I will break down the full steps for those that need to build their understanding of this process.

Starting income£60,000
Step 1Deduct personal allowance (no income tax paid)£11,000
Step 2Deduct basic rate tax band (income taxable at 20%)£32,000
Income subject to higher rate tax£17,000

The next stage is to calculate what the pension tax relief will be.

You will automatically receive basic rate tax relief on the £20,000 gross contribution, and so the client only pays £16,000 into the pension, with HMRC providing the rest.

As only £17,000 is subject to higher rate tax, this is the limit of gross contribution that will receive higher rate tax relief.

TOP TIP: Higher rate tax relief is claimed via self assessment, and provided by increasing the basic rate tax band.

So what happens the client needs to submit a self assessment tax return stating their pension contributions and HMRC will increase the basic rate tax band. In this example it would look as follows:

So £17,000 of the gross contribution would receive higher rate tax relief (or a further £3,400).

The total tax relief is therefore £7,400 (or effectively 37% tax relief).

Factors to consider and double check:

  • Has the client got an employer scheme, either via salary sacrifice or member contribution. Remember to take this into account. It’s often easy to forget about the plans a client has if we aren’t directly advising on them (well it is for me anyway!).
  • Are you also recommended regular contributions? Don’t forget to take these contributions from the amount that higher rate tax relief can be granted on.
  • Do you limit the contribution to the amount that will receive the full higher rate tax relief? If you know the client only has a one off sum and is unlikely to max out their contributions in the following year, you could split the contribution over two tax years to ensure all of the contribution receives 40% tax relief. The likely future funding level is also an important factor to consider.

Finally many clients simply forget to claim for their higher rate tax relief (or don’t realise they need to do so).

It may be worthwhile sending your clients a reminder to do this, or even using it as an opportunity to build a relationship with your client’s accountants.

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