Are you missing out? A number of individuals may be due additional tax back from HM Revenue & Customs (HMRC) and in such cases it is possible to claim up to four backdated years. Many people work for businesses that outsource their obligation to provide a pension to a preferred supplier typically an insurance company. This could be either a stakeholder pension or group personal pension plan. In addition self employed people working through private limited companies with a Self Invested Personal Pension plan (SIPP) in place could be due tax back.
The money paid (contribution) into the plan by such employees is after deduction of income tax at the basic rate of 20%. This is in accordance with tax practice in this area. The plan then claims basic rate tax back from HMRC and puts it into the individuals’ plan alongside their net contribution to equal the total amount of the underlying investment being made. The plan does not deal with any other entitlement a taxpayer may have to further relief (see below).
Where, however, the person concerned is entitled to additional relief at the higher rate of tax of 40% or additional rate tax of 50% then they or their tax agent must claim it either through their self assessment tax return or through their tax code. Self employed persons should claim the additional tax back through their self assessment tax return. However, this does not affect tax relief on any contribution by the employer.
An individual invests into their pension plan above say, an amount of £500 per calendar month but only has to pay £400 after deduction of basic rate tax at 20%. If the individual concerned is subject to higher rate tax at 40% then an additional claim of 25% of the net payment must be made to HMRC i.e. £100 per calendar month. In practice this would amount to an increase in the personal tax code of £3,000 to give back to the individual his/her additional £100 per calendar month.
Employer pension schemes
Where the employer runs a final salary (defined benefits) or money purchase (defined contribution) scheme then any money put in by an individual will automatically attract the appropriate level of tax back through their payroll as the contribution is deducted each pay day from gross salary.
Additional information about the above can be found in our earlier article this year entitled “HMRC PAYE Notice of Coding” published 24 January 2012.