Pensions Technical factsheet June 2014

Transcription

1 Pensions Technical factsheet June 2014 For financial advisers only Claiming tax relief on personal s This communication is for financial advisers only. It mustn t be distributed to, or relied on by, customers. This factsheet is based on our understanding of current legislation, which may change. The value of any tax relief depends on the individual circumstances of the investor. What are the methods of claiming tax What are the limits on tax How is basic rate tax relief given? How is higher rate tax relief calculated? How is additional rate tax relief calculated? How are thirdparty s treated for tax How do you claim higher rate tax How do you claim additional rate tax What is the time limit for claiming tax

2 What are the methods of claiming tax Tax relief on personal s to a pension arrangement can generally be given in three ways: 1. Net pay For a scheme operating under the net pay arrangement, the employer deducts the from the member s pay before operating Pay As You Earn (PAYE) in this way the member gets tax relief immediately at the highest marginal rate. On a net pay basis, because s are deducted from pay, tax relief will only actually be available on a maximum of earnings, even if these are less than 3,600. For example, if relevant UK earnings are 3,000, this will be the maximum gross amount that tax relief will be available on. Tax relief on personal s made by a third party can t be given under net pay. If such a is made, the member must claim any relief due via self-assessment. Typically, occupational pension schemes accept personal s using the net pay method. 2. Relief by claim The is paid gross, and the member claims tax relief through self-assessment. Typically, retirement annuity contracts accept personal and third party s using the relief at claim method. Note, retirement annuity contracts can accept s using the relief at source method if a provider has made a decision to allow this. If an individual s earnings are below 3,600 pa and they have a retirement annuity contract to which they make gross s, they will only be able to claim tax relief on up to 100% of their earnings. If an individual has no earnings, they will be unable to claim tax relief on any pension s they make. 3. Relief at source Under a scheme operating relief at source, s are paid net of basic rate tax. The scheme administrator claims the tax relief due from HMRC and applies it to the member s arrangement. Higher and additional rate taxpayers can claim the extra tax relief through self-assessment. Typically, personal pension and stakeholder arrangements accept personal and third party s using the relief at source method. Although it is possible under HMRC guidance, for retirement annuity contracts to accept s by relief at source, some providers will only accept gross s in practice. What are the limits on tax The tax-relievable limit for personal s is the higher of: 100% of the member s relevant UK earnings or 3,600, per year. All s paid by a member plus those paid on their behalf by a third party or by their employer are tested against the annual allowance. If a member s total s exceed their annual allowance limit for the tax year (even after carry forward has been used), they will still be able to claim higher rate and additional rate tax relief on their personal s, but an annual allowance charge will apply to the excess s. The allowances and tax rates applicable in the 2014/15 tax year are: Allowances & Tax bands Tax year 2014/15 Annual allowance 40,000 Personal Allowance 10,000* Basic rate tax band -20% Up to and including 31,865 Higher rate tax band 40% 31, ,000 Additional rate tax band 45% Over 150,000

3 *The personal allowance is reduced by 1 for every 2 of income above a 100,000 income threshold, so in effect there s no personal allowance for those earning 120,000 or above. How is basic rate tax relief given? A member s personal s are paid to a personal pension provider net of basic rate tax. This is the case whether the member pays the s directly to the provider, or the employer deducts the net from the member s pay (after the deduction of income tax) and passes it on. This method of providing basic rate tax relief is known as relief at source. If a member has relevant UK earnings of less than 3,600 but is making a personal of more than this, they can get tax relief on the excess over their relevant UK earnings up to the limit of 3,600. Relief at source is the only method which allows members to get this extra tax relief on s that exceed their relevant UK earnings (up to 3,600). Even if an individual has no earnings, they will still be able to claim tax relief on any pension s they make by relief at source up to the limit of 3,600. The personal pension provider will add basic rate tax relief to the net so that the total gross amount is invested for the member. The pension scheme provider will recover the basic rate tax relief from HMRC. Tom pays a personal monthly net of 400 to his employer s group personal pension scheme. His employer deducts the net amount from Tom s pay after tax and national insurance have been deducted. The 400 is paid to Tom s personal pension plan and basic rate tax relief of 100 is added which means a gross of 500 per month is invested. Although it is possible under HMRC guidance for s to be paid to a retirement annuity contract net of basic rate tax relief, some providers will only accept gross s in practice. Where the is paid gross to the retirement annuity contract, tax relief will need to be claimed from HMRC. Tax relief is given by way of a deduction from the member s total income. How is higher rate tax relief calculated? Higher rate taxpayers may be entitled to further tax relief on personal s paid to their personal pension scheme. As the pension scheme provider gives basic rate tax relief at source, the member claims any higher rate tax relief from HMRC. The extra tax relief available depends on the total personal s paid and the member s total income. The extra tax relief due is given by extending the basic rate tax limit. The following example show how this works. Barry s gross income is 100,000. His personal allowance is 10,000, which means he has taxable income of 90,000. He makes a net pension of 32,000 to his pension provider and basic rate tax relief of 8,000 is added, resulting in 40,000 being added to his personal pension. The following table shows that he can claim a further 8,000 higher rate tax relief: assuming no pension assuming 40,000 gross pension Tax rate Tax band Tax Tax band Tax 0% 10, , % 31,865 6,373 31,865 6,373 20% extension N/A 40,000 8,000 40% 58,135 23,254 18,135 7,254 Total tax 29,627 21,627 His total gross annual is 6,000 ( 4,800 net)

4 The difference between the total tax figures is 8,000 and this is the higher rate tax relief that Barry can claim back from HMRC. The total tax relief of 16,000 is 40% of the gross of 40,000. In this example, Barry s income has to be above 81,865 ( 10, , ,000) to allow him to claim full higher rate tax relief on the paid. If, say, his income was 65,000 and a 40,000 gross was made to his personal pension, then he would not be able to claim higher rate tax relief on the whole of the. He would only be able to claim higher rate tax relief on 23,135 ( 65,000-31,865-10,000), which would equate to 4,627. That is, the 20% extension is only given up to the level of his income of 65,000. The total tax relief would be 12,627, made up of 8,000 at basic rate and 4,627 at higher rate. How is additional rate tax relief calculated? Additional rate taxpayers may be entitled to further tax relief on personal s paid to their personal pension scheme. As the pension scheme provider adds basic rate tax relief at source, the member claims any higher rate and additional rate tax relief from HMRC. The extra tax relief available depends on the total personal s paid and the member s total income. The extra tax relief due is given by extending both the basic and higher rate tax limits for additional taxpayers. The following examples show how this works. Larry s gross income is 200,000. His personal allowance is 0, which means he has taxable income of 200,000. He makes a net pension of 32,000 to his pension provider and basic rate tax relief of 8,000 is added, resulting in 40,000 being added to his personal pension. The following table shows that he can claim the maximum 10,000 additional rate tax relief: assuming no pension assuming 40,000 gross pension Tax rate Tax band Tax Tax band Tax 20% 31,865 6,373 31,865 6,373 20% extension N/A 40,000 8,000 40% 118,135 47,254 78,135 31,254 40% extension N/A 40,000 16,000 45% 50,000 22,500 10,000 4,500 Total tax 76,127 66,127 The difference between the total tax figures is 10,000 and this is the additional rate tax relief that Larry can claim back from HMRC. The total tax relief of 18,000 is 45% of the gross of 40,000. In this example, Larry s income has to be above 190,000 ( 31, , , ,000) to allow him to claim full additional rate tax relief on the paid. If, say, his income was 175,000 and a 40,000 gross was made to his personal pension, then he would not be able to claim additional rate tax relief on the whole of the. He would only be able to claim additional rate tax relief on 25,000 ( 175,000-78,135-40,000-31,865), which would equate to 11,250. That is, the 40% extension is only given up to the level of his income of 175,000. The total tax relief would be 19,250, made up of 8,000 at basic rate and 11,250 at additional rate.

5 How are third-party s treated for tax A third-party is paid by a person other than an employer. A person is defined in HMRC guidance as an individual, a corporate body or other legal entity. The is treated as if the member had paid it so the third party pays the net of basic rate tax but it s the member who gets basic rate tax relief and can claim any higher rate and additional rate tax relief on the gross. Even if the third party is a higher rate or additional rate taxpayer, they are not entitled to claim any tax relief on a they pay into someone else s pension scheme. Jane pays a net annual of 2,000 to her personal pension plan and her husband pays a further net annual of 2,000 into her plan. Basic rate tax relief of 1,000 is added so a total gross of 5,000 is invested in Jane s plan. As Jane is a higher rate taxpayer with earnings of 100,000, she can claim an additional 20% relief on the total gross amount of 5,000. So the extra tax relief that Jane can claim is 1,000. How do you claim higher rate tax Disregarding the net pay system, there are two ways for higher rate tax relief to be claimed: 1. Through the annual self-assessment tax return Higher rate tax relief can be claimed by entering the amount of gross personal s made to a personal pension scheme in the relevant part of the annual self-assessment form (including any s made by a third party). Employer s should not be included in this amount. Tax relief is given in one of three ways: a change to the tax code. a tax rebate. a reduction in tax already due to HMRC. 2. By notifying the local tax office People who don t usually fill in an annual self-assessment form, or who don t want to wait for their higher rate tax relief, can phone or write to their local tax office with details of: the personal pension scheme that personal s are being paid to, the date that the s start, and the gross amount of the personal s paid. The local tax office will then arrange for their tax code to be changed so that higher rate relief is available throughout the year in which the s are being made. Any changes to the information given can be notified either by letter or through a self-assessment tax return at the end of the tax year. How do you claim additional rate tax Disregarding the net pay system, additional rate tax relief must be claimed through a self-assessment tax return. This would be done in the same way as described under How do you claim higher rate tax. Details of how to contact HMRC for help with Self-Assessment and Income Tax enquiries can be found here: HMRC guidance for tax relief on member pension s can be found here:

6 What is the time limit for claiming tax There is a time limit of four years to claim back any tax relief from HMRC. A claim must be made within four years of the end of the tax year that a member is claiming for. For example, if tax relief is to be claimed for the 2010/11 tax year, then a claim would need to be made by 5 April This could be of use for higher/additional rate taxpayers if they had forgotten to claim higher and/or additional rate tax relief for any personal s they had made. Further information from HMRC on claiming tax relief after the deadline for self-assessment for the relevant tax year has passed can be found here: This factsheet was produced by Pensions Technical Services pts@aegon.co.uk Aegon is a brand name of Scottish Equitable plc, registered office: Edinburgh Park, Edinburgh EH12 9SE. Registered in Scotland (No ). Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. FCA register number An Aegon company Aegon UK plc C /14