Ms K.M. Asks:
My employer provides a Group Personal Pension Scheme of which I am a member. I am a higher rate tax payer and aware that my payments qualify for tax relief but how does this work in practice as I do not seem to be getting it at present?
Peter Sharratt Answers:
Assuming the Pension does NOT operate on a salary sacrifice basis (more on that later) your payments will be taken from your net (after Tax) salary. This payment; lets assume £80pm, will qualify for Basic Rate Tax Relief (currently 20%) at source and as such you actually end up with £100pm being invested in to the Pension i.e. Basic Rate Tax Relief is added to your payment.
As a Higher Rate Tax you are also entitled to an additional 20% Tax Relief but this has to be claimed from the Tax Office usually by completing a Self Assessment Tax Return. The Tax Return can only be completed after the Tax Year has finished but it would then give you a Tax Rebate £240 (£20pm x 12). Allowing for all Tax Relief it actually costs you £60pm to get £100pm invested in to the Pension.
The upshot is that Basic Rate Tax Relief is awarded automatically but the additional Higher Rate Relief has to be claimed which can be a bit of a pain. A way around this would be to see if your employer will allow a Salary Sacrifice. This basically means that you agree to Sacrifice an amount of Salary equal to the Gross Pension payments. Taking my earlier figure this would be £1,200 (£100pm x 12). As a result your Net Income reduces by £60pm (the amount that it would have cost you to pay in to a Pension allowing for all Tax Relief).
Your employer then pays the £1,200 in to a Pension for you. The result is that you have now the same amount of money invested in a Pension but you have not had to claim any Tax Relief. Sacrificing your salary also gives you and your employer a National Insurance savings which they may use to further increase the payments in to your Pension.
There are some downsides however; sacrificing your salary may reduce other employee benefits such as Death in Service and it may also reduce the amount that you can borrow in future. It also needs to be documented correctly and so do get appropriate advice.
If you would like more advice regarding this issue or any other financial services matter, please contact us.
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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
