Pension rebate

[Skynet5]

So I'm in an ok position and last year started to shove a fair bit in to my personal pension.

My pension provider gives me an auto top up of 20% - so say I put 160 in, my pot ends up 200 better off. This is because contributions are tax free and should be from source.

I've just done my self assessment and plugged in my contributions to my personal pension (adding on the 20% the provider adds, as it says I should do).

The return states I have X amount as an overpayment. Which is 20% again atop of the above pension contributions. So basically you are getting you contributions into you pension as though it was from source - basically getting your tax back.

Question: How does this work? Do they just return the rebate to my account? That doesn't make sense, as I could then push that money in to my personal pension and then "claim" the 40% again. 20% automatically added by the pension provider, and another 20% when I do my SA next year.

Can someone clarify? It would make sense if the rebate from the SA went straight to my pension provider but that isn't the case I don't think

 

[Destination]

You get the additional 20% towards your tax rebate.
It comes off the amount of tax you should be due to pay under PAYE.
It doesn't hit the pot so to speak, from my understanding, you simply pay less tax.

 

[Skynet5]

You get the additional 20% towards your tax rebate.
It comes off the amount of tax you should be due to pay under PAYE.
It doesn't hit the pot so to speak, from my understanding, you simply pay less tax.

Thanks.

So if it is added to my tax allowance that all makes sense.
I'd be confused if they gave me that money to my current account, as I could then add it to my pot and theoretically claim 40% on top of that rebate...

 

[Destination]

Well in theory anything you earn in pay that is above the 40% tax bracket, you could dump directly into your pension over the course of the year.
This would maximise your tax saving/contributions.
You'd need to have that amount lying free doing nothing, however.

 

[Skynet5]

Thanks.

So if it is added to my tax allowance that all makes sense.
I'd be confused if they gave me that money to my current account, as I could then add it to my pot and theoretically claim 40% on top of that rebate...

Or to look at it another way, if feel like my rebate is tax free money for me to spend now...

 

[weringo]

The pension provider claims back tax at the basic rate of 20% and adds this to your pot. If you're a higher rate taxpayer (which it sounds like you are) you also get another 20% back when you complete your tax return.

 

[Skynet5]

The pension provider claims back tax at the basic rate of 20% and adds this to your pot. If you're a higher rate taxpayer (which it sounds like you are) you also get another 20% back when you complete your tax return.

Yeah I get that. My question is how is this returned to you. As if it was cash in the bank then isnt have effectively tax free cash?

 

[weringo]

It's paid into your bank account if you opt for that payment method. It's not tax free cash, its a repayment of tax you have overpaid because PAYE (assuming this how your tax was paid) does not take into account that you have made pension contributions which are deductible from your taxable earnings.

If you were to pay that cash into your pension you would again obtain tax relief (assuming you have sufficient taxable income in that tax year and you haven't breached your annual allowance etc) as it is a contribution to your pension which is tax deductible. That tax relief is given by reference to your taxable income in that tax year, not by reference to the fact that you have obtained the cash as a tax rebate. The source of the specific cash you use to make the pension contribution is irrelevant as to whether the contribution carries tax relief.

 

[Destination]

Yeah I get that. My question is how is this returned to you. As if it was cash in the bank then isnt have effectively tax free cash?

Less tax contribution.
They tax you on the eventual pension.
So they get their money eventually

Lets say you earn above the 40% bracket, pension contributions do not count as income for taxable purposes.
So in theory you should be due back all 40% of the tax you paid on your contributions.
But your pension has already claimed 20% of this, so you claim the other 20%. Either as a rebate if you've already paid the tax, or as less into your tax bill if you have not.

 

[Skynet5]

It's paid into your bank account if you opt for that payment method. It's not tax free cash, its a repayment of tax you have overpaid because PAYE (assuming this how your tax was paid) does not take into account that you have made pension contributions which are deductible from your taxable earnings.

If you were to pay that cash into your pension you would again obtain tax relief (assuming you have sufficient taxable income in that tax year and you haven't breached your annual allowance etc) as it is a contribution to your pension which is tax deductible. That tax relief is given by reference to your taxable income in that tax year, not by reference to the fact that you have obtained the cash as a tax rebate. The source of the specific cash you use to make the pension contribution is irrelevant as to whether the contribution carries tax relief.

Fantastic explanation. I knew my thinking was wrong, as it didn't make sense. Just didn't make that leap in understanding. But now it is clear.

Cheers.