Pension Tax Relief on a Tax Code

Clearwaterfp

I'm trying to understand how pension tax relief appear on my client's tax code as the numbers bear no relation to the amounts she has contributed.
She is a higher rate taxpayer and contributes to a PPP (paid net) and an RAC (paid gross)

She has a personal allowance of £12,570
Payment to RAC - £1,236
Personal Pension Relief - £1,002
Total tax free amount £14,808 Tax Code 1480L

1. Should the RAC figure be the total gross amount she contributed?
2. Personal pension relief - is this 20% of the gross amount she contributed?

Any help would be much appreciated.
Thanks
Debbie

richardgough

RAC being paid gross so the code to be increased by gross amount, as you have said. (The code increases by gross payment to RAC / 10) This arises from PA = £12,570 giving a tax code of 1257.

This extends the PA by the gross RAC contribution to give both basic and higher rate relief. Extending the PA moves the income from the highest tax bracket into the extended 0% tax bracket.

PP is paid net so basic rate relief is not coded. It is the amount of PP to which higher rate relief is due (adjusted for the fact that basic rate relief has already been given) which is added to the tax code.

If £1,000 was the gross PP contribution falling in the higher rate band then client is due £200 tax relief.

By taking half of the gross contribution and adding this to the tax code you need to move (in the £1,000 example) £500 out of 40% tax into 0% tax - to get a tax reduction of £500 * 40% = £200, which matches the £1,000 * 20% higher rate relief due.

Bear in mind HMRC will be coding on current PA and tax bands but last year’s income and pension data it is now easy to see why it will very nearly always be wrong, not allowing for the inevitable errors in any case.