Extra pension contributions in year of retirement

Can I please check if I have understood by way of a rough example?


In the tax year that someone retires, suppose their salary for the part of the year before retirement is £10,000. They pay £750 into their employer's pension scheme by salary sacrifice. If I understand correctly, this means that their 'relevant earnings' for pension purposes is £9,250. The employer adds £550 in pension contribution, making a total amount into the pension scheme of £1,300.


In the same tax year, the person opens a SIPP and pays in £6,360. HMRC will add £1,590, making a total amount of £7,950 in the SIPP.


Taken together, total additions to the pensions is then £9,250, or 100% of relevant earnings, and so is allowable. Is this calculation method correct?
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  • bigadaj
    bigadaj Posts: 11,531
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    First thing to consider is that you can't salary sacrifice below minimum wage so that is a factor.

    apart from that consideration then your calcs look fine.
  • Linton
    Linton Posts: 17,066
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    etienneg wrote: »
    Can I please check if I have understood by way of a rough example?


    In the tax year that someone retires, suppose their salary for the part of the year before retirement is £10,000. They pay £750 into their employer's pension scheme by salary sacrifice. If I understand correctly, this means that their 'relevant earnings' for pension purposes is £9,250. The employer adds £550 in pension contribution, making a total amount into the pension scheme of £1,300.


    In the same tax year, the person opens a SIPP and pays in £6,360. HMRC will add £1,590, making a total amount of £7,950 in the SIPP.


    Taken together, total additions to the pensions is then £9,250, or 100% of relevant earnings, and so is allowable. Is this calculation method correct?

    Your calculation is wrong in that employer contributions dont count against the relevent earnings limit. Also salary sacrifice contributions are actually employer contributions. Your relevent earnings therefore do not include the Salary Sacrifice amount. I assume that when you say the salary is £10000 with £750 paid by SS, you actually mean the salary is £9250 and that in return for you taking a lower salary your employer adds £750 to the employer contribution.

    So you can pay 80% of £9250=£7400 into your SIPP which HMRC increases by £1850 making a total of £7400+£1850+£750+£550=£10550 in your SIPP.
  • bigadaj
    bigadaj Posts: 11,531
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    Linton wrote: »
    Your calculation is wrong in that employer contributions dont count against the relevent earnings limit. Also salary sacrifice contributions are actually employer contributions. Your relevent earnings therefore do not include the Salary Sacrifice amount. I assume that when you say the salary is £10000 with £750 paid by SS, you actually mean the salary is £9250 and that in return for you taking a lower salary your employer adds £750 to the employer contribution.

    So you can pay 80% of £9250=£7400 into your SIPP which HMRC increases by £1850 making a total of £7400+£1850+£750+£550=£10550 in your SIPP.

    Don't disagree and I was going to comment but the total into the pension is the same, they've just split the £9250 from the £750 as their contribution and then added the employer contribution of £550 on top.
  • Linton
    Linton Posts: 17,066
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    bigadaj wrote: »
    Don't disagree and I was going to comment but the total into the pension is the same, they've just split the £9250 from the £750 as their contribution and then added the employer contribution of £550 on top.

    The key difference was that the OP was failing to make all the pension contribution he/she could have made as he/she was including the employer's £550 against the relevent earnings limit.
  • etienneg
    etienneg Posts: 461
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    Thanks for the replies. Whilst I knew that all contributions made by salary sacrifice are classed as employer contributions, I hadn't realised that employer contributions didn't count towards the limit.


    Why, oh why, are these things made so complicated?!
  • kidmugsy
    kidmugsy Posts: 12,709
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    etienneg wrote: »
    Why, oh why, are these things made so complicated?!

    Because, by and large, MPs and civil servants aren't affected.
    Free the dunston one next time too.
  • mgdavid
    mgdavid Posts: 6,705
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    etienneg wrote: »
    Thanks for the replies. Whilst I knew that all contributions made by salary sacrifice are classed as employer contributions, I hadn't realised that employer contributions didn't count towards the limit.

    Why, oh why, are these things made so complicated?!

    I wouldn't complain too hard as it works in your favour....
    The questions that get the best answers are the questions that give most detail....
  • I just red this from http://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/pension-contributions-the-basics/

    "Individual, employer and third party contributions all count towards the annual allowance, MPAA and the tapered annual allowance."

    So I am assuming employer contributions by salary sacrifice DO count towards the £40,000 limit eg if I earn 42,000 AFTER a salary sacrifice (which results in my employer contributing say 5,000) then all I can now put in is (40,000 - 5,000) x 0.8. Is that not so?
  • Linton
    Linton Posts: 17,066
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    I just red this from http://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/pension-contributions-the-basics/

    "Individual, employer and third party contributions all count towards the annual allowance, MPAA and the tapered annual allowance."

    So I am assuming employer contributions by salary sacrifice DO count towards the £40,000 limit eg if I earn 42,000 AFTER a salary sacrifice (which results in my employer contributing say 5,000) then all I can now put in is (40,000 - 5,000) x 0.8. Is that not so?

    Correct...

    Though there is another quirk: The earned income limit must be used in the current tax year, whereas anything left over from the £40K limit can be carried forward 3 years.
  • So "The key difference was that the OP was failing to make all the pension contribution he/she could have made as he/she was including the employer's £550 against the relevent earnings limit."

    was incorrect?
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