Your Money Queries – 6th May

Q. I am a Higher Rate taxpayer and, as such, my marginal rate is 40%. I am a member of my employer’s group personal pension scheme and contribute to the scheme via my employer’s payroll. I had understood that I received tax relief on my contributions, but a colleague has told me that I can claim additional tax relief from HMRC. Is this correct?

A. Possibly, although this will depend upon how your contributions are collected and paid.

If your contributions are deducted from your net salary, you may well be able to claim additional tax relief of 20%. This represents the difference between basic rate tax (20%) and your rate of tax (40%). This is because personal pension plans assume tax relief is due at the basic rate of tax (20%) only and this is therefore the amount that is reclaimed automatically via your employer’s payroll.

If you are in this situation, you ought to complete a tax return, detailing how much you have earned and the pension contributions you have made. HMRC rules permit you to backdate claims by up to four years. Therefore, if you have paid tax at 40% for the past four years, you have contributed to your employer’s group personal pension and you have not claimed your Higher Rate tax relief on your contributions, you might be due a significant sum.

If however, your employer has set the scheme up on a “Salary Sacrifice” basis, meaning that your salary is reduced in return for an increased employer pension contribution, effectively you will have already received tax relief at 40% and you will be ineligible for a refund.

Q. I am the beneficiary of a trust, which was established by my late grandfather before his death. The trust provides me with a considerable annual income. I have been informed that my husband intends to file for divorce and he has indicated that he expects the income from the trust to be taken into account when we seek to negotiate a financial settlement. I was under the impression that the trust would be excluded from an assessment of our matrimonial assets (which was one of the main reasons my grandfather established the trust). Is this correct?

A. First, I am sorry to hear that you are to divorce and I wish you all the best.

Whether or not the trust (and the income you have received from it) is taken into account for the purpose of negotiating a financial settlement will depend upon a number of factors.

For example, it will depend upon the type of trust that was established by your late grandfather. If it is a “discretionary trust” then you have no rights to income or capital; you are one of a group of potential beneficiaries who may receive a benefit if the trustees determine that you ought to. In those circumstances it ought to be more difficult for your husband to argue that the benefits you have derived from the trust be taken into account. It may also be relevant when the trust was established (i.e. before or after your marriage) and the regularity with which you have received benefits.

In my experience, family courts do not always regard trusts in the same manner as other courts and may seek to look behind the trust in order to reach what the court considers to be an equitable outcome. I recommend therefore that you seek advice from a solicitor, who specialises in family and matrimonial law, as soon as possible. It would be in your best interests if you could ensure that that solicitor is also an expert in tax and trusts, or has access to such an expert within their firm.

Q. I have received a lump sum settlement as a result of been made redundant. I have no immediate need for the money and I would like to invest it. A friend has recommended that I invest my redundancy settlement in a PEP. However, I have never come across PEPs. Could you explain what they are and whether such an investment would be suitable, please?

A. PEPs (or, to give them their full title, Personal Equity Plans) were introduced in 1986. They were a tax-efficient savings vehicle, intended to encourage the general public to invest in quoted shares.

ISAs were introduced in 1999 to replace PEPs. Since that time, no new PEPs could be created and no additional contributions made to an existing PEP. All PEPs were converted to stocks and shares ISAs automatically on 6 April 2008.

You are unable therefore to invest in a PEP, although you may wish to consider investing in an ISA. There are limits on the amount which you can save into an ISA in any tax year and, therefore, depending upon the value of your settlement, you may need to consider another suitable investment vehicle in addition to an ISA. I recommend therefore that you seek advice from a chartered financial planner, preferably one who specialises in investments, before proceeding.

If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.

Rutherford Wilkinson Ltd is authorised and regulated by the Financial Conduct Authority.