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  • FIRST POST
    • etienneg
    • By etienneg 18th May 17, 1:50 PM
    • 39Posts
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    etienneg
    Extra pension contributions in year of retirement
    • #1
    • 18th May 17, 1:50 PM
    Extra pension contributions in year of retirement 18th May 17 at 1:50 PM
    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?
Page 1
    • bigadaj
    • By bigadaj 18th May 17, 9:34 PM
    • 8,957 Posts
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    bigadaj
    • #2
    • 18th May 17, 9:34 PM
    • #2
    • 18th May 17, 9:34 PM
    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
    • By Linton 18th May 17, 9:58 PM
    • 7,675 Posts
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    Linton
    • #3
    • 18th May 17, 9:58 PM
    • #3
    • 18th May 17, 9:58 PM
    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?
    Originally posted by etienneg
    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
    • By bigadaj 19th May 17, 1:35 PM
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    bigadaj
    • #4
    • 19th May 17, 1:35 PM
    • #4
    • 19th May 17, 1:35 PM
    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.
    Originally posted by Linton
    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
    • By Linton 19th May 17, 2:22 PM
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    Linton
    • #5
    • 19th May 17, 2:22 PM
    • #5
    • 19th May 17, 2:22 PM
    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.
    Originally posted by bigadaj
    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
    • By etienneg 22nd May 17, 4:38 PM
    • 39 Posts
    • 11 Thanks
    etienneg
    • #6
    • 22nd May 17, 4:38 PM
    • #6
    • 22nd May 17, 4:38 PM
    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
    • By kidmugsy 22nd May 17, 10:26 PM
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    kidmugsy
    • #7
    • 22nd May 17, 10:26 PM
    • #7
    • 22nd May 17, 10:26 PM
    Why, oh why, are these things made so complicated?!
    Originally posted by etienneg
    Because, by and large, MPs and civil servants aren't affected.
    • mgdavid
    • By mgdavid 23rd May 17, 9:56 AM
    • 5,157 Posts
    • 4,328 Thanks
    mgdavid
    • #8
    • 23rd May 17, 9:56 AM
    • #8
    • 23rd May 17, 9:56 AM
    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?!
    Originally posted by etienneg
    I wouldn't complain too hard as it works in your favour....
    A salary slave no more.....
    • eyeonretirement
    • By eyeonretirement 23rd May 17, 7:19 PM
    • 18 Posts
    • 3 Thanks
    eyeonretirement
    • #9
    • 23rd May 17, 7:19 PM
    • #9
    • 23rd May 17, 7:19 PM
    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
    • By Linton 23rd May 17, 7:57 PM
    • 7,675 Posts
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    Linton
    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?
    Originally posted by eyeonretirement
    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.
    • eyeonretirement
    • By eyeonretirement 23rd May 17, 8:38 PM
    • 18 Posts
    • 3 Thanks
    eyeonretirement
    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?
    • Linton
    • By Linton 23rd May 17, 10:10 PM
    • 7,675 Posts
    • 7,463 Thanks
    Linton
    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?
    Originally posted by eyeonretirement
    No, there are two separate limits with different rules. The one which was discussed first in this thread and is what your quoted paragraph was about relates to earned income. The other which was discussed most recently is 40K. The maximum you can put into your pensions in a year is the lower of the two limits.
    • eyeonretirement
    • By eyeonretirement 24th May 17, 11:18 AM
    • 18 Posts
    • 3 Thanks
    eyeonretirement
    I understand the two limits and the lower of the two being the one to use. It was if employer contributions ie salary sacrifice count towards that limit?
    Last edited by eyeonretirement; 24-05-2017 at 11:19 AM. Reason: punctuation
    • Linton
    • By Linton 24th May 17, 11:55 AM
    • 7,675 Posts
    • 7,463 Thanks
    Linton
    I understand the two limits and the lower of the two being the one to use. It was if employer contributions ie salary sacrifice count towards that limit?
    Originally posted by eyeonretirement
    Employer contributions count towards the 40K limit but not the earned income limit.
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