When you make a payment to a charity under the Gift Aid scheme, you deduct basic rate income tax from the payment. On making a claim, the charity recovers from HMRC the tax deducted. If you’re entitled to higher rate relief, you’re given it in your self-assessment.
If it turns out that, for whatever reason, the amount of tax you pay for the year (including Capital Gains Tax) is less than the amount that you deducted from Gift Aid payments, you must tell HMRC and pay over the shortfall. This can sometimes have unexpectedly unreasonable results, as we observed in the unfortunate case of Webster. But the logic of the basic rule is impeccable – HMRC won’t repay to a charity tax that it hasn’t received from you.
When you make a payment to your personal pension scheme, the position is almost the same as for a Gift Aid payment. You deduct basic rate income tax from the payment. On making a claim, the pension scheme recovers from HMRC the tax deducted. If you’re entitled to higher rate relief, you’re given it in your self-assessment.
But if it turns out that, for whatever reason, the amount of tax (including Capital Gains Tax) for the year is less than the amount that you deducted from pension payments – it doesn’t matter.
Provided the contribution to your personal pension scheme is no more than your ‘relevant earnings’ (and also less than the annual allowance – which is in most cases £40,000) the pension scheme can recover the basic rate tax that you have deducted from the contribution, even if you haven’t actually paid any tax for the year.
So if, for example, you have business profits as a self-employed person or a partner but you don’t have tax to pay because you are able to set historic business losses against them, that is no bar (at least as far as tax is concerned) to making a pension contribution which generates for the pension fund a repayment of basic rate tax that you, er, haven’t paid.
Odd thing, this tax game.
For more information, please get in touch with your usual BKL contact or use our enquiry form.
