Working out my pension contributions

relaxtwotribes

I am in a quandary about working out the maximum amount I can contribute to my personal pension plan. I have an annual earned income of £5,500 and dividend income that puts me into the HRT bracket.

I have already paid £2,880 into my pension this year.

My question is this: is the maximum amount I can contribute this tax year £4,400 (being 80% of £5,500)? If so, then I can make another contribution of £1,520 (being £4,400 less £2,880 already paid). With the pension company adding on the 20% the total will be £5,500 and I can make a claim for additional HRT relief on my next tax return.

The reason I ask this question is that I don't pay any tax on the £5,500 earnings, being within the annual personal allowance, and the HMRC website indicates that no tax relief is due where no tax is paid, i.e. on the earnings between £3,600 and £5,500.

Guidance much appreciated, thanks.

zygurat789

First of all you do pay tax - by deduction on dividends.
You should also, probably, receive a tax refund, do you submit a tax return, if so how?
I assume the £2880 is a stakeholder pension and, therefore, will not affect any calculation of how much you can get tax relief on.
If you have dividend income of at least £30k why do you need a pension - it's all sorted. In your position I'd save it in an ISA for tax free income.

relaxtwotribes

Thank you for your interest, zygurat789, and please excuse me if I confused you.
I know that I pay tax on the dividends, HRT even, but the earned income comes to me tax-free by way of being less than the personal allowance, does it not?
To answer your question, I do not receive a tax refund, I pay HRT, but I do receive relief from HRT for the pension contributions (max £2,880) that I have made in previous years. And, yes, I do submit an annual tax return.
ISA contributions are ruled out due to the maximum having been made this year already.
And, finally, I need a pension because the dividend income will cease before retirement.
Thanks once more for your input.

jem16

relaxtwotribes wrote: »

I know that I pay tax on the dividends, HRT even, but the earned income comes to me tax-free by way of being less than the personal allowance, does it not?

Your earned income and dividend income all count as taxable income.

I presume you declare this earned income on your tax return?

relaxtwotribes

Yes, jem16, all income is declared on my tax return. And I know that earned and unearned income is taxable.

Are you able to help with my original question?

BULLNOTBEAR

You can pay 100% of the annual earnings and you will be able to claim higher rate tax relief if you pay higher rate tax. Obviosuly take off your current contribution for this tax year of £3,600 gross (£2,880 net) from the £5,500 (£4,400 net) available. You will therefore be able to make a contribution of £1,900 (gross) meaning a £1,520 net (actual contribution you will pay).

I hope this helps.

BULLNOTBEAR

You do not effectively pay tax on your earned income as this is the first to be taxed followed by interest income and then dividend income on your tax return but you get tax relief at your highest rate so the pension tax relief works in your favour here. Obviously if you had more earned income then you could pay a higher amount into pensions but you would then of course pay more NI etc.

TH1878

relaxtwotribes wrote: »

I am in a quandary about working out the maximum amount I can contribute to my personal pension plan. I have an annual earned income of £5,500 and dividend income that puts me into the HRT bracket.

I have already paid £2,880 into my pension this year.

My question is this: is the maximum amount I can contribute this tax year £4,400 (being 80% of £5,500)? If so, then I can make another contribution of £1,520 (being £4,400 less £2,880 already paid). With the pension company adding on the 20% the total will be £5,500 and I can make a claim for additional HRT relief on my next tax return.

The reason I ask this question is that I don't pay any tax on the £5,500 earnings, being within the annual personal allowance, and the HMRC website indicates that no tax relief is due where no tax is paid, i.e. on the earnings between £3,600 and £5,500.

Guidance much appreciated, thanks.

Your net relevant earnings with respect to tax-relievable pension contributions are £5,500 meaning you can make a gross contribution of £5,500 in the 09/10 tax year (£4,400 net). As you've paid £2,880(net), you can make a further contribution of £1,520.00 (net)

You will receive 20% tax relief at source and the remaining 20% will be claimed on your tax-return.

Hope this helps.

TH1878

DD5 wrote: »

I assume you're running a limited company, hence why your income is mainly made up from dividends?

I was contracting for a couple of years and made contributions to my personal pension through my company via employer contributions. The advantage of employer contributions are that they reduce your Corporation Tax bill, are paid gross into your pensions scheme and cut down hugely on your self assessment tax admin. You can also (within reason) put as much as you like into the pension plan. It's a great way for contractors to shield excess money from the tax man, though the down side is that you can't get hold of any of it until age 55, and then only 25% (though tax free). I used to make a regular monthly £300 contribution into my pension and £300 into my wife's pension (she was company secretary) and then also put lump sums into both pensions whenever I was flush.

If you don't have your own company or chose not to make ER contributions from your company (though why you wouldn't is beyond me) then the max you can contribute is 100% of your PAYE earnings, in your case £5500.

I'm assuming that corporation tax relief for the OP is 21% but he's a higher rate tax payer so he would get 40% on his pension contributions.

You're right about his maximum personal tax relievable contribution. However, HMRC state that if an employee seems to have a comparatively low salary but a high level of employer’s pension contributions, then it must be proved that this is not as a result of National Insurance liability planning.

BULLNOTBEAR

I hear an echo!! ha ha

TH1878

BULLNOTBEAR wrote: »

I hear an echo!! ha ha

Shout louder

Didn't actually see yours but whilst the figures are correct, this bit isn't:

You can pay 100% of the annual earnings

His annual earnings are in excess of the HRT threshold, his net relevant earnings are £5,500. Me pedantic? Never!