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Replies to Queries - 1 - Delayed repayment

19 September 2001
Issue: 3825 / Categories:

My client is a schoolteacher of many years' standing and on 3 May 2001 she paid the sum of £10,570.19 gross in order to purchase additional service of her teacher's pension, as arranged with Teachers' Pensions, Darlington. She was advised that she could not deduct tax at the basic rate because this was a lump sum one-off payment. It was also said that she could not pay any additional voluntary contributions in the current tax year, having made this lump sum payment.

My client is a schoolteacher of many years' standing and on 3 May 2001 she paid the sum of £10,570.19 gross in order to purchase additional service of her teacher's pension, as arranged with Teachers' Pensions, Darlington. She was advised that she could not deduct tax at the basic rate because this was a lump sum one-off payment. It was also said that she could not pay any additional voluntary contributions in the current tax year, having made this lump sum payment.

My client was advised by Teachers' Pensions to contact her tax office for the appropriate relief. She is not a higher rate taxpayer.

I have told my client that the claim will need to be made on her next tax return for the year ending 5 April 2002, but she is dismayed at having to wait so long for relief amounting to £2,325. No doubt there is a reader somewhere who can come to the aid of this damsel in distress.

(Query T15,876 ) – Fairfax.

 

The Teachers Pension Scheme is a final salary or defined benefit scheme and relief for the added years purchased is obtained by virtue of section 592(7), Taxes Act 1988. The actual mechanism by which relief is given depends entirely on how the added years are paid for. A regular series of payments exceeding one year (Method A) will allow each instalment to be deducted from monthly gross salary under pay-as-you-earn in the same way as the 6 per cent fixed deduction, relief being given by calculating the tax on the net figure. If, as in this case, the payment is a single lump sum (Method B) then Teachers Pensions advises the teacher to 'speak to your Inspector of Taxes' to obtain the relief. In other words, the question of how relief is given requires negotiation, even though the relief itself is not in doubt.

If the tax relief and its timing was critical to 'Fairfax's' client, then she could have made regular monthly payments over a period exceeding one year and obtained immediate relief through the pay-as-you-earn system as discussed above. Alternatively, she could have bought the added years by means of a single payment made in 2000-01 and submitted form 375 to Teachers Pensions to reach it on or before 28 February 2001. This is the last date on which it will guarantee that the claim is processed by 5 April 2001, thus allowing a claim after the end of the tax year in the manner proposed by 'Fairfax' for the current tax year.

In the circumstances discussed, tax relief for the payment made in 2001-02 can be accelerated by reminding the Inspector that, under section 592(7), relief should be given at the highest marginal rate of tax in the year in which it is paid, subject to the limits imposed by section 592(8). This is confirmed in IR12 (2001) Occupational Pension Schemes Practice Notes, Part 4, paragraph 4.2, and paragraph 4.3 goes on to state that relief is to be given through the PAYE system. The Inspector will readily concede the principle of when relief is due, and should quickly amend the 2001-02 code number so that relief will occur throughout the remainder of the current tax year. Given that the added years were purchased in May and that we are now half-way through the pay-as-you-earn and tax year, it is suggested that this would be a very acceptable solution to 'Fairfax's' client. – Gateley Wareing.

 

Tax relief on pension premiums has, since 6 April 2001, been by deduction of tax from the premiums paid by both employed and self-employed policyholders. For about a decade prior to 5 April 2001 that method of relief applied to employees only, while the self employed paid premiums gross. Previous to that, everybody paid premiums gross. Relief for premiums paid gross was by deduction from the assessment, but employees, being taxed in instalments under pay-as-you-earn, could have their codes adjusted to allow for contributions or premiums, so that the relief also impacted in instalments, precisely matched to the tax payments.

That is the solution in this case. The client should report the contribution to the PAYE Inspector and require a code adjustment. The effect will be that half the tax will be recovered with the September salary, the rest arriving in monthly instalments over the rest of the tax year. It is not the same as getting it all at once, but at least it is not delayed until the tax return 2002 is processed.

This transaction is essentially a step back in time. – Man of Kent.

Issue: 3825 / Categories:
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