Industry news and analysis

Higher rate tax relief

(relief-at-source schemes)

As many as a quarter of higher rate taxpayers don’t claim the additional tax relief they are entitled to. It is a rare individual that turns down free money, so the underlying cause must surely be lack of awareness?

A personal contribution made by a higher rate taxpayer to a personal pension plan – or any scheme that operates on the ‘relief at source’ basis – is usually paid net, which means the client pays 80% of the total contribution and the pension provider adds the 20% basic rate tax relief. The provider claims the basic rate tax relief back from HM Revenue & Customs.

This is the end of the story for basic rate and non-taxpayers. Higher and additional rate taxpayers should, ultimately, get 40% and 45% tax relief, respectively – assuming they are entitled to full tax relief on the contribution at their top rate of tax. But despite their total entitlements they only get 20% tax relief up front because they must pay 80% of the total contribution, which means they fund the higher or additional rate tax relief themselves. Their claim to HMRC via self-assessment for the extra tax relief, therefore, amounts to a tax refund. This approach ensures there is no detriment to the pension fund itself as the full gross contribution is credited to the plan immediately, but clients who do not claim the extra tax relief will be left out of pocket.

Following the steps detailed below will ensure the maximum tax benefits are obtained.

1) Use the Scottish Widows tax relief calculator to determine how much tax relief the client is entitled to for a given level of contribution.

2) Pay the net personal contribution to a personal pension plan.

3) If the client is entitled to higher or additional rates of tax relief they must claim the extra tax back via self-assessment. They should complete box 1 of the ‘Tax Reliefs’ section on the main self-assessment form, SA100:

4) If the annual allowance has been exceeded, they should also complete box 10 of the ‘Pension savings Tax Charges’ section of the supplementary form, SA101:

5) Make a claim for any missed higher or additional rate tax relief for up to the previous 4 years by contacting HMRC.

  

10 October 2017

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Scottish Widows Limited. Registered in England and Wales No. 3196171. Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number 181655.

Scottish Widows Unit Trust Managers Limited. Registered in England and Wales No. 1629925. Registered Office in the United Kingdom at Charlton Place, Andover, Hampshire SP10 1RE. Tel: 0345 300 2244. Authorised and regulated by the Financial Conduct Authority. Financial Services Register number 122129.

HBOS Investment Fund Managers Limited, registered in England number 941082. Registered office in the United Kingdom at Trinity Road, Halifax, West Yorkshire HX1 2RG. Authorised and regulated by the Financial Conduct Authority. Financial Services Register number 119223.

Scottish Widows Bank is a trading name of Lloyds Bank plc. Registered office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales, no. 2065. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under number 119278.

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