Suppose you are a higerh rate Tax earner, and you pay into a monthly pension. As per these questions:
- Payroll pension contributions- UK higher rate tax relief
- UK income tax relief on pension contributions (higher rate)
and also my company's Finance Department, the standard description of how the tax works is this:
- You pay £80 into your pension, after (40%) Tax.
- Your pension provider claims £20 of basic rate (20%) tax ("relief at source", I believe)
- You tell HMRC about it, and get another £20 back from HMRC (for the other 20%).
This description is so consistently given, that I believe it must be right. But I don't understand why ....
I assume that the premise is:
"The government decided that pensions are a GoodThing(TM), so if you're going to put your income into a pension then it doesn't get taxed."
I feel like the following logic ought to be valid:
- Supposing I'm receiving an extra £1,000 of gross salary, and I want to put it into a pension, then I should be able to put all of that into a pension. Thus my pension ought to go up by £1,000.
- But in reality, I don't receive £1,000 ... I receive £600, because 40% tax.
- Then I give that £600 to the pension provider.
- Based on the model in the above questions, the pension provider would claims back £150. (£20 / £80 = 0.25 | 0.25 * £600 = £150)
- Again based on the model in the above questions, I contact HMRC and get given another £150.
- Now I have £750 in my pension, and £150 in hand. Total: £900
What happened to the other £100?
What is it that I've misunderstood.