Pension Contributions and Income Tax

Mr_Proctalgia

I have a hypothetical question for the experts on here if I may.

I am saving for a pension with my current employer 4% from me 6.5% from them. I also pay an addition 4% in the form of AVC's into the same scheme. I choose to do this because, a: It is easy b: The subsidised AMC is 0.05% and they pay for a one off consultation with an IFA and finally, it seems to be doing alright thus far.
I also have a small extra income from a previous personal pension that I crystallised via capped drawdown a couple of years ago. I pay tax at "BR" on this little extra.

Now for the actual question. I now find myself with "spare money" at the end of the month (previously having spent years struggling with spare month at the end of the money!)
I am considering increasing my AVC's to mop up this unused income, however, I was wondering what happens when your pension contributions take your net taxable income (my contributions are taken gross) below your tax threshold and you are taken out of the income tax bracket?

Does the pension Co claim back the extra 20% ?
Can I move some of my allowance over to cover my income from the Drawdown Pension and thus lower my Personal Allowance on my main income and thus give the pension more tax to claim from or is there something that I have missed?
I feel the need to start some planning with this as I shall soon be receiving another pension income which may mean that I could put a large percentage of my earned income into my pension pot and thus give me a last chance to bump up my savings. Also as a secondary question, could this be construed as recycling as the new pension will come with a 3X annual pension gratuity as well as an income?

I must say that the more I think about this the more confused I get, we are not talking lots of money here, but enough to have some impact on my future life when retired, and, I should also state that I am as thick as mince so please all you experts put any replies in very plain english.

Thanks in Advance

mania112

I don't fully understand your situation, but if i respond generally hopefully it'll help.

If you contribute via salary sacrifice and it reduces your take-home to fall back into the 20% bracket, nothing happens. You can only get 20% relief on that portion (that falls into it) and you nor your employer can claim any more (that falls into that portion).

Now, if you start taking income from a pension, it's layered on top of your working income. Working income will be taxed first (and benefit from the personal allowance) and other income sits on top.

So if the pension income breaches back into 40% it will be the pension that suffers that charge. Don't forget, in Drawdown you can choose how much income you take, so you can manipulate that income to ensure you don't pay high-rate tax.

Pension recycling rules dictate that you can only 'recycle' 50% or £30k tax free cash (whichever lower). Recycling income is fine.

Mr_Proctalgia

Thank you Mania 112.

My income will not fall back into the 20% bracket as it never left it; but; it may however, fall into the 0% bracket ( I earn little and spend even less) as I said I am not talking huge amounts of money here.

So to clarify, if my Personal Allowance is 950L (which it is) and I make AVC's to take my net income below this level, what happens to the unused part of my Tax Code? Can I claim it against my pension income, is it lost or what?

I do appreciate that it is hard to explain things on a forum and that I have probably left out something germain but eventually I shall get there - I hope

kidmugsy

Mr_Proctalgia wrote: »

... it may however, fall into the 0% bracket
So to clarify, if my Personal Allowance is 950L (which it is) and I make AVC's to take my net income below this level, what happens to the unused part of my Tax Code? Can I claim it against my pension income, is it lost or what?

You are taxed on the sum of your taxable earnings plus your pension income plus (if you have any) interest on savings and other relevant things. If you make such large contributions to AVCs that your taxable earnings fall below your personal allowance, then that means that part of your pension income will then become tax-free.

The question is how best to tell HMRC. You presumably don't want to wait and do a self-assessment return next tax year, so I suppose that you'd want to phone them and explain what's happening, expecting that they'll then issue a new tax code to your pension company (or companies).

Mr_Proctalgia

Thanks for that - I have got it now. You help is appreciated

jamesd

Your employer is prohibited from letting you use salary sacrifice to take your pay below minimum wage. So you can't use salary sacrifice to get your income below the income tax threshold.

Recycling pension income into more pension contributions is beneficial. In salary sacrifice where it's possible within the limits the income tax and NI savings are good. Outside salary sacrifice 25% is still added to give basic rate tax relief but HMRC will adjust for your actual tax position so you don't end up getting relief on the money that went below the point at which income tax is payable.

You can recycle an unlimited amount of pension lump sum but you need to pay attention to the rules and not do it too fast if it's into a pension in your own name. There are limits on how much can be recycled over rolling five year periods. No limits if it's into a pension for someone else, like a spouse. For smaller amounts there are convenient single year calculations that make it easy for many people to know it's fine. Roughly how much is the potential lump sum?

The main easy rules for lump sum recycling allow:

1. All of the lump sum to be recycled if the total amount of all lump sums is less than 1% of the lifetime allowance. The lifetime allowance is currently £1.5 million but this will go down to £1.25 million from 6 April 2014 so the amount is now £15,000 but will drop to £12,500.
2. Up to 30% of the lump sum to be used in one year, but much more than this can be done just by waiting two years for recycling art of it. Only the increase over what you were doing before getting the lump sum counts in this calculation.

mania112 wrote: »

Pension recycling rules dictate that you can only 'recycle' 50% or £30k tax free cash (whichever lower).

I think that there are four mistakes in that quote; only (nope), 50% (30% but not a limit, just a rule applies threshold), 30k (1% of lifetime allowance) and lower (higher is fine done over time). Please do take another look at the rules and also look into the rules for the cumulative basis over five years calculation that allows far more than just 30% of the lump sum to be recycled if it is done over many years.