Pension Contributions Tax Relief Limits

riaplan

I am a basic rate tax payer nearing retirement paying regular contributions into the Legal & General Group Personal Pension Plan and I wish to put in a lump sum to take full advantage of tax relief before the end of the 2009/2010 tax year. Contributions are paid net, and L&G claim back from HMRC to gross them up.

I thought I could put in up to 100% of earnings.

However the accountant at work as pointed out that that the tax relief would only be applicable to the "taxable earnings" i.e. my total earnings for this year less my personal allowance. I found a tax optimisation pension contribution calculator on the web which suggests this is true.

But the Government pensions web site is not explicit about this, except for persons who benefit from the age related allowance, and being under 65 this is not applicable to me.

Can anyone clarify this? Is the tax relief restricted to taxable earnings?

dunstonh

I thought I could put in up to 100% of earnings.

you can.

However the accountant at work as pointed out that that the tax relief would only be applicable to the "taxable earnings" i.e. my total earnings for this year less my personal allowance. I found a tax optimisation pension contribution calculator on the web which suggests this is true.

Its not true. You can pay 100% in against your earned income and get tax relief on the whole amount (subject to higher rate limitations).

jamesd

The accountant at work would be right if the contributions were gross from your employer. For the net contributions that you are contemplating:

"Limits on tax relief

You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension is subject to an 'annual allowance'. For the tax year 2009-10 the annual allowance is £245,000 and for the 2008-09 tax year it was £235,000. You pay tax at 40 per cent on any contributions you make that are above the annual allowance."

and

"Limits on tax relief

You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension is subject to an 'annual allowance'.

For the tax year 2009-10 the annual allowance is £245,000 and for the 2008-09 tax year it was £235,000. You pay tax at 40 per cent on any contributions you make that are above the annual allowance."

Pastyman_2

Excuse my ignorance but did not quite follow the thread.
If I have made monthly contributions direct from my salary into my pension pot, but now want to put an additional lump sum in, am I right that HMRC will only add an amount up to my salary less my personal allowance, i.e. limited to my taxable earnings?

MikeJones_2

Hi Pastyman,

If you earn £30,000 this tax year as salary (for ease of explanation as an example), you can contribute £30,000 into a registered pension scheme during this tax year. You don't have to deduct/allow for the personal allowances. There are limits as explained above (i.e. tax relief is available up to 100% of earned income limited to the Annual Allowance).

I'd be interested to know where you've seen this latter information though. Care to place a link here or PM me?

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

zygurat789

OK so earnings £30K taxable income £23,525 Pension tax relief set against taxable income £30K Result no tax paid, however, there is excess relief which has been wasted.

Pastyman_2

It's not the amount I can contribute that I am confused about, it's the tax relief. If my salary is £30000 and my personal allowance is £6470, my taxable earnings are £23530. At 20%, the amount of tax is £4706.
Is this £4706 the maximum that HMRC will credit to my pension pot if I make a lump sum contribution in this financial year?

Damask

No. The tax relief would be applied to all of your earnings.

This means that you can contribute up to £24,000 net, and the tax relief would be applied to bring it back up to the £30,000.

£30,000 would be the highest tax relieved amount which you could paid in.

This wouldn't affect any employer contribution and they could still pay in up to £215,000 for you without causing any annual allowance charges.

Debt_Free_Chick

There is a limit on the tax relief you can receive and it's 100% of your relevant UK earnings chargeable to income tax, in the tax year in which the contributions are paid.

See this section of the Pension Schemes Manual

When the green (?) paper was first published on Simplification, it was stated that the tax relief given on pension contributions would/could not exceed the amount of income tax that the individual was due to pay. So .... if you paid 100% of your gross pay in to your pension plan, you would be owed a tax rebate, as not all of you gross pay is taxable (assuming you have a personal allowance). But in this case, you would not get a refund - you'd simply get a "nil" tax bill.

That was the original intention and I wonder if this is what the pension scheme's manual is implying, by limiting relief to your "relevant UK earnings chargeable to income tax".

Or is the final position different to that originally envisaged, so that you could get a tax refund if you paid 100% of your gross salary into your pension plan?

Damask

Not quite.

The net contribution to the pension must be at the level so that the tax relief returns you to 100% of your relevant earnings.

In the example above, someone earning £30,000 could pay £24,000 as a net contribution and the tax relief of £6,000 would make the contribution back up to the £30,000.

The personal allowance isn't relevant, as it's further down the tax calculation than you need to go. Your first step is to work out what relevant income is chargeable to income tax. The personal allowance (along with other allowances, etc) is used to calculate the amount of tax you have to pay. If you think of the personal allowance as a 0% rate band it may help.

Damask

I've found this on a factsheet from work...

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For other relievable pension contributions, the maximum that the member will receive tax relief on is the greater of:

* the basic amount of £3,600, and
* 100% of relevant UK earnings

Note that the above are gross amounts. A member cannot, for example, pay a net contribution of 100% of earnings and receive tax relief on the whole amount.

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