 |
 |
|
|
The relief may be given in one of four ways:
Gross deduction.
Net contribution grossed up and given as an extension of the basic rate band.
Net contribution grossed up and given as a deduction with tax retained added back.
Rate restricted relief.
A gross contribution is a payment made in full by the taxpayer. A deduction is given for the full amount paid. For example a self-employed taxpayer with £40,000 of taxable income, if he makes a £4,000 contribution to a personal pension scheme, this deduction is given in full. Rates shown for 2000-01 year and the taxable income is shown after deduction of any personal allowances.
|
Taxable income 1,520 @ 10% 26,880 @ 22% 7,600 @ 40%
Tax borne (due) |
36,000 152.00 5,913.60 3,040.00 ------------- 9,105.60 |
A net contribution means one paid net of basic rate tax. For example, for every £78 contributed, the government will add £22 to make a gross contribution of £100. There are two ways of giving the deduction in the tax calculation. The gross amount may be given as a deduction with the basic rate tax added back as tax retained or the basic rate band may be extended by the gross amount. Both methods give the same relief for higher rate taxpayers and make no difference to the tax paid by a basic rate taxpayer.
For example, an employee has £40,000 of taxable income in 2000-01 and makes a personal pension contribution (net) of £3,120:
|
Taxable income 1,520 @ 10% 30,880 @ 22% 7,600 @ 40%
Tax borne (due) |
40,000 152.00 6,793.60 3,040.00 -------------- 9,985.60 |
The basic rate band has been extended by £4,000 (£3,120 / 78 x 100). The tax borne is £880 higher than the gross deduction example, above, but the government will be paying that £880 directly into the pension fund so the result is the same for the taxpayer.
Adding back Tax Retained
The gross amount is deducted and the basic rate tax (not actually paid by the taxpayer) is added back. For example a taxpayer with £40,000 of taxable income makes a deed of covenant paying £3,120 to a charity.
|
Taxable income 1,520 @ 10% 26,880 @ 22% 7,600 @ 40%
Tax borne Tax Retained
Tax due |
36,000 152.00 5,913.60 3,040.00 ------------- 9,105.60 880.00 -------------- 9,985.60 |
Why have two methods?
There is no difference for a basic rate or higher rate taxpayer. However, the addition of tax retained will have an effect on starting rate or non-taxpayers because the basic rate tax retained will be clawed back. For example, if a charitable donation of £780 is made under deed of covenant by a non-taxpayer, they will have to pay £220 tax back to the Revenue to cover the tax retained.
Some deductions are restricted to lower rates of tax. The relief is given by making no deduction from the taxpayers total income but by giving a 'tax credit' at the rate restricted rate. For example a taxpayer pays £4,000 interest on a non-MIRAS loan, relief restricted to a rate of 10% (1999-2000):
|
Taxable income 1,500 @ 10% 26,500 @ 23% 12,000 @ 40%
Tax borne 4,000 @ 10%
Tax due |
40,000 150.00 6,095.00 4,800.00 -------------- 11,045.00 -400.00 -------------- 10,645.00 |
If the taxpayer does not have sufficient tax borne to cover the rate restricted relief, the relief is lost.