Why won't HMRC pay tax relief on my pension?

17 September 2013

Q

I was placed on sick leave in October 2007, for which I received six months' full pay and six months' half pay, along with a state benefit. This was in addition to three months' full pay at the beginning of 2008 from the county council I worked for. It then regarded me as unfit for work and is now paying me a monthly amount from the pension I had with it.I thought it would be a good idea to place some money from my savings into a personal pension. I didn't know that, because I had started this pension before 1990, I had to claim the tax relief from HM Revenue & Customs (HMRC). When I tried to do this, HMRC said that because my earnings came from sickness benefit, I was not entitled to any tax relief on the amount invested. I was also told the backdating option from previous years had ceased to apply since 2006.I have since read that even with no earnings, we are entitled to a tax incentive for amounts placed into a pension of in the region of £3,000 per year. I placed £7,000 into my pension on 20 April 2009 when I was 58. Is HMRC being fair to me?
From
David Edwin Jones, Wales

A

Sickness benefit can be included as earnings for pension contributions as long as it was paid by the employer and chargeable to tax. However, you should, in theory, still be entitled to some tax relief. Even those who don't pay tax can still pay into a personal pension and benefit from basic-tax relief at 20% on net contributions of £2,880 per year, which equates to a gross contribution of £3,600.

It sounds as if the personal pension you have might be a Retirement Annuity Contract. With these, you don't benefit from any initial tax relief at source and instead have to claim all tax relief due through your tax return or, if you don't complete a tax return, by contacting HMRC. These contracts stopped being provided from 1 July 1988, when personal pensions were introduced.

As you made your pension contribution on 20 April 2009, this will fall into the 2009/10 tax year and so this is the relevant year for taxable earnings. It seems that your full pay finished in March 2009, which is in the 2008/09 tax year. A possible contradiction here is that you didn't seem to have relevant earnings in the 2009/10 tax year and so, in theory, should rely on the £3,600 gross contribution limit for tax relief. However, the only allowable method to claim tax relief in this way is through "relief at source" where you benefit from the 20% tax relief as soon as your investment is made, without having to claim it on your tax return.

According to the HMRC website: "If a member has relevant UK earnings of less than the basic amount of £3,600, but is making a contribution of more than the level of their earnings, Relief At Source is the only method by which the member can get tax relief on the excess contribution (up to £3,600)."

You have asked whether HMRC is being fair and the answer is probably no. However, it is sticking to the rules. It just seems that you have fallen through a gap in these rules because of when you made your contribution and the type of pension policy that you probably hold. You should discuss your situation with HMRC and see if it will credit you with the tax relief, which you should, in theory, have been entitled to.

If you do make any pension contributions in the future, you can benefit from getting initial tax relief upfront if you use a new personal or stakeholder pension rather than your existing policy.