It is important for tax purposes to distinguish between payments into:
- An occupational pension scheme runs by an employer
- A personal pension scheme
Occupational scheme – The employer takes the pension contributions from pay before deducting tax. The employee pays tax on what’s left. So whether tax is paid at basic, higher or additional rate full relief is given straightaway.
Personal scheme – Pension contributions will be paid from earnings that have already been taxed. The pension provider therefore claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 paid into the pension, £100 ends up in the pension pot.
Claiming higher rate relief – If your tax is paid at a higher rate, the difference is adjusted through the self-assessment scheme – effectively the tax “bands” are adjusted
Non tax payers – If you don’t pay tax you can still pay into a personal pension scheme and benefit from basic rate tax relief (20 per cent) on the first £2,880 a year you put in. In practice this means that if you pay £2,880 the government will top up your contribution to make it £3,600. There is no tax relief for contributions above this amount.
Limits on tax relief – You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension from which you benefit from tax relief is subject to an ‘annual allowance’. These figures are taken from the accounts of Mobile mechanic London. The annual allowance for the tax year 2013-14 is £50,000. Payments made above this limit will be subject to a tax charge.
You can carry forward any unused annual allowance from the last three tax years to the current tax year so you might not have to pay the annual allowance charge.
The tax charged on excess payments will be calculated at the taxpayer’s marginal rate of tax.
Administration – For many taxpayers who are in full time employment, with no other sources of income – or indeed capital gains – tax is collected through the PAYE system and the taxpayer does not actually come in contact with HMRC at all.
SA – Income which is not taxed at source is subject to the self-assessment system. As the name implies this system lays the responsibility for ensuring that the tax is paid on the taxpayer himself.