Returning to UK, with lump sum. Tax breaks on pension contributions?

moocherx

Hello all.
I have read through some posts on tax relief for pension payments, but some seem out of date. I'm therefore asking for a little help to clarify.

I am returning to be a UK tax payer after many years overseas. I have a lump sum in cash, and I don't think savings rates are good.

I thought instead to pay a lump sum into a pension scheme, because I understand you get tax relief on it. I also understand this used to be unlimited (or very high), but is now much lower.

If I am a higher rate tax payer, is there a "magic sum" that I should put in to get the maximum available tax relief?

Many many thanks in advance for any help.

jem16

Tax relief is available on sums equal to 100% of your earnings up to £50k.

More info here;

http://www.hmrc.gov.uk/pensionschemes/annual-allowance/index.htm

moocherx

Great, thanks.
So the magic number to put into a pension scheme is £50k.
As I earn £55k, and 5k is below the tax threshold, I presume I won't pay tax at all (unfortunately, just this year only...).

atush

How are going to live on 5k? Thisgs have gotten pricy here in your absence ;-)

moocherx

I'll live on my salary. It's the 50k sat in the bank which will go into the pension.
I'm assuming I'll only be taxable on 5k from the HMRC allowance.

jem16

moocherx wrote: »

As I earn £55k, and 5k is below the tax threshold, I presume I won't pay tax at all (unfortunately, just this year only...).

Depends on the way you look at it I suppose. You will still pay tax but that amount (or at least the 20% part of it ) will be added to your pension. You will then need to claim the extra 20% higher rate tax relief on £7525.

moocherx

Does it mean that the inland revenue literally puts an extra 10k into the pension scheme, or do they give it to you in the form of a tax rebate and you have to put it in yourself?
And sorry for being dumb... does it mean that while the allowance is 50k, the actual pension contributions are finally 60k for the year? (50k + 20%)
Thanks

jem16

moocherx wrote: »

Does it mean that the inland revenue literally puts an extra 10k into the pension scheme, or do they give it to you in the form of a tax rebate and you have to put it in yourself?

What normally happens when paying into a private pension is that you pay in the net amount and the pension provider grosses it up by the basic rate tax relief. So a £50k gross would see you paying in £40k and then £10k is added to make it up to £50k. The extra 20% due on the £7525 you would have to claim from HMRC and that would be refunded to you as cash.

So you would not be able to pay in your whole £50k as a lump sum this year.

And sorry for being dumb... does it mean that while the allowance is 50k, the actual pension contributions are finally 60k for the year? (50k + 20%)
Thanks

£50k as explained above.

However what might work for you is the unused allowance from previous years but I don't know if it applies to you with you returning to the UK.

hugheskevi

Ideally you want to be putting all higher rate tax income into a pension, in your case about £13,000.

The benefits of putting money into a pension that only gets basic rate relief is far less, as 75% of it is taxed when you draw it later in life.

Therefore, you want to ensure that you put enough into the pension to get higher rate tax relief every year, as there is no point putting in a big amount now and only getting basic rate tax relief on it and then not putting in enough in future years to get all the higher rate relief.

Depending on the size of the lump sum, you might therefore wish to put £13K into a pension (ie full higher rate tax relief), £10K (ie full annual limit) into an SSISA and the rest in unwrapped investments (exploiting capital gains allowance) and in future years feed money into the pension and ISA to maximise reliefs.

kidmugsy

Don't forget to enquire of your employer about (i) his potential contributions, and (ii) salary sacrifice, which is a particularly good way to contribute because you reduce nics (national insurance contributions).