I put £750 a month into a pension for my son. How does tax relief work? STEVE WEBB responds

I pay £750 into a Sipp for my son every month and the tAx Relief recharge is paid automatically.

However, I am a higher rate taxpayer. Can the additional tax relief be claimed or is it calculated at the basic rate which is my child’s tax rate?

SCROLL DOWN TO FIND OUT HOW TO ASK STEVE HIS PENSION QUESTION

This is what Money retirement expert Steve Webb responds to: People are often surprised to learn that it is possible to contribute to someone else’s pension.

This applies to defined contribution type pensions, such as personal pensions, although not to more traditional defined benefit or salary-related pensions.

In simple terms, if you pay someone else’s pension, HM Revenue and Customs treats this contribution as if it were made by the recipient and not you.

In your case, where the person receiving the pension is a basic rate taxpayer and the donor is a higher rate taxpayer, unfortunately a reduction from the higher rate cannot be claimed.

Do you have a question for Steve Webb? Scroll down to find out how to contact you.

This is because your child is considered to have made the contributions themselves and is only a basic rate taxpayer.

As you say, because you are paying into a self-invested personal pension, or any other form of personal pension that provides tax relief via the “relief at source” method, basic rate tax relief is automatically added.

This means that on top of your £750 payment each month, HMRC will add £187.50 directly to your child’s pension.

You don’t need to take any additional steps to get this tax relief.

However, if your child was receiving a DC occupational pension where tax relief is provided through a ‘net pay’ arrangement, the recipient may need to contact HMRC to obtain tax relief.

A second factor to consider is that because the money you pay into your child’s pension is considered paid by him and not by you, this would not count against your annual tax-privileged pension contribution limit.

This means that if, for example, you have used up your own annual pension allowance, you can continue to contribute to someone else’s pension without exceeding the annual allowance.

Another consequence of the contribution being considered made by your child and not by you is that, if you were not an employee, you can only contribute £2,880 a year, with a maximum of £3,600 tax relief, while benefiting from the tax about pensions. relief.

But because he is an employee, you can pay an amount that, adding tax relief and including contributions from him and his employer, is not more than his annual salary.

One caveat is that I notice you are paying £750 per month and this ends up being worth over £10,000 per year once tax relief has been added.

Therefore, you would just need to be careful that your child has not previously withdrawn the pension money and activated the ‘annual money purchase allowance’ which limits their tax-favored savings to £10,000 per year.

Check if you have exceeded your annual money purchase allowance through the government website.

Should you contribute to someone else’s pension?

The decision about whether or not it is a good idea to contribute to someone else’s pension is complex and the correct answer will vary from person to person.

Below I give some of the general pros and cons that you may want to consider, but I don’t go into more complex areas such as inheritance tax implications.

An advantage where the beneficiary has a higher income is that the money that goes into their pension, or is treated as having been paid, can be deducted from their income when calculating things such as the high income child benefit charge. outside.

We also know that there are high rates of “under-savings” among the next generation, who will typically not have access to the high-quality pensions of previous generations.

Anything you can do to help your child’s generation build up a decent pension will go a long way in the future.

For similar reasons, if one member of a couple has a much lower pension than the other, contributing to a spouse’s or partner’s pension can help level the playing field.

This can be especially attractive if you come up against your own annual pension savings limit.

Another attraction of contributing to a spouse’s pension is that, during retirement, each member of the couple has a portion of the income that is tax-free, the personal allowance, and a portion of the income that is only subject to tax at the time of retirement. basic type, the band of basic types.

If one person in a couple has the majority of the pension income, it is quite possible that they will end up moving into higher tax bands.

But if pensions are split more evenly, it’s more likely that you’ll both only pay basic-rate taxes in retirement, saving taxes overall.

However, the main thing to remember is that saving into your own pension is currently very tax efficient for a higher rate taxpayer like you.

If you could benefit from a further rate reduction if you save more into your own pension or if you could receive generous contributions from your employer, then you need to make sure it still makes sense to contribute to someone else’s pension.

> We want to give away excess income to avoid inheritance tax: what are the rules?

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