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Self Assessment – Pension Contributions

Higher rate relief on personal pension contributions is generally given through Self Assessment. Here are some key dates for Self Assessment and the effect of pension contributions on payments on account and balancing payments.

Higher rate relief is not paid into your personal pension automatically. There are two ways higher rate relief is given; making a claim through self assessment or by an adjustment to your tax coding. If you pay tax through Pay As You Earn (PAYE) the adjustment to your tax coding is done automatically. If you are not paid through PAYE, and don't want to wait until you complete a self assessment, you can obtain relief through a change to your tax coding if you write to your tax office, with details of the gross pension contributions made. This template letter is available for this purpose.

Self Assessment

Income tax may be payable either ‘on account’ or as a balancing payment or both depending on your liability under Self Assessment for the prior year. For the first year on Self Assessment you always only ever make a balancing payment on the 31 January following the tax year.

For subsequent tax years the tax liability is met by making payments on account and a balancing payment. An individual will have to make two payments on account. The first payment is on 31 January in the current year and the other by the following 31 July. For example, for the tax year 2014/15 (6 April 2014 to 5 April 2015) the first payment on account will be due on 31 January 2015. The second payment on account will be due on 31 July 2015.

Payments on account are each equal to one half of the previous year’s tax liability. Any balance of tax to pay or repayment (where the amount paid on account exceeds the tax liability) will become due on 31 January following the tax year in question and so on.

Each taxpayer will receive a statement of account which looks similar to a credit card statement. This document will summarise the payments required and the payments that have been made.

Summary of key dates for 2016/17 tax year tax liability

31 January 2017

First payment on account

31 July 2017

Second payment on account

31 January 2018

Balancing payment for 2016/17 liability and first payment on account for 2017/18

Example

Bob’s income tax liability for 2013/14 is £12,000. His tax liability for the year 2014/15 is £13,500. Bob’s payments for 2014/15 will be as follows:

31 January 2015

First payment on account
(this is equal to half of 2013/14 tax liability)

£6,000

31 July 2015

Second payment on account
(this is equal to half of 2013/14 tax liability)

£6,000

31 January 2016

Balancing payment for 2014/15

£1,500

 

Total

£13,500

 

Bob will also have to make the first payment on account on 31 January 2016 of £6,750 for the 2015/16 (half of the 2014/15 liability).

Personal pension contributions and tax relief

Personal Pension Schemes operate relief at source, where both employee and self-employed contributions are made net of basic rate tax. The provider applies basic rate relief to the contribution regardless of the tax status of the individual. Higher rate relief is given by increasing the basic rate band by the amount of the gross pension contribution. Higher rate relief is generally given under self-assessment rules or by adjusting the individuals PAYE tax coding (employees only).

A pension contribution will affect the tax bill in the year that it is paid. For example, if a pension contribution is made in January 2016 it will reduce the tax bill for the tax year 2015/16.

Generally speaking, under self assessment, this will mean reducing the balancing payment due on 31 January 2017. Consequently, from the payment of the pension contribution, it can take between approximately 10 and 22 months until the individual receives any higher rate relief depending on whether they make the contribution at the start or end of a tax year. For example if a pension contribution is made on 6 April 2015, under Self Assessment it could be approximately 22 months until tax relief is given via the balancing payment due on 31 January 2017 or 10 months if it was made at the end of the tax year.

As the tax liability in the year of payment is reduced by the pension contribution, each of the payments on account for the next year will be reduced. This means that if a large contribution is not repeated in the next tax year it may have the effect of increasing the balancing payment the client will have to make in the future.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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