Limits on Contribution Tax Relief

Zebra

I've being doing my own research on the limits on tax relief for pension contributions, and just wanted to confirm that my understanding is correct.

For a final salary pension scheme, there are two limits on tax relief that apply.

1. A limit to gross pension contributions, whether employee contributions, ARC's, AVC's and personal pension contributions up to 100% of gross earnings, being salary and investment income, but not rental income.

Is that correct? If so does it also include employers contributions?

2. An annual allowance, currently £50,000, of pension savings, which is an increase in the value of the pension and is approximately the change in annual pension, corrected for inflation, and multiplied by 16.

Would appreciate some confirmation. Thanks.

jem16

Zebra wrote: »

I've being doing my own research on the limits on tax relief for pension contributions, and just wanted to confirm that my understanding is correct.

For a final salary pension scheme, there are two limits on tax relief that apply.

1. A limit to gross pension contributions, whether employee contributions, ARC's, AVC's and personal pension contributions up to 100% of gross earnings, being salary and investment income, but not rental income.

Your tax relief, limit wise, is based on your gross salary. The amount of tax relief that you get is based on your taxable income.

So if you earned £35,000 you would get £35,000 worth of tax relief. However if your total taxable income is £50k ( including salary, investment income and rental income you would be entitled to higher rate tax relief.

If so does it also include employers contributions?

No it's just your own contributions.

2. An annual allowance, currently £50,000, of pension savings, which is an increase in the value of the pension and is approximately the change in annual pension, corrected for inflation, and multiplied by 16.

Would appreciate some confirmation. Thanks.

May also include any automatic lump sum.

Zebra

jem16 wrote: »

Your tax relief, limit wise, is based on your gross salary. The amount of tax relief that you get is based on your taxable income.

So if you earned £35,000 you would get £35,000 worth of tax relief. However if your total taxable income is £50k ( including salary, investment income and rental income you would be entitled to higher rate tax relief.

Thanks Jem, I wasn't concerned with the rate of tax relief but rather the limits of relief and whether that was based on contributions and relevant salary earnings only and not other 'un-earned' income, but appreciate the confirmation.

jem16 wrote: »

No it's just your own contributions.

Thanks, that makes sense.

jem16 wrote: »

May also include any automatic lump sum.

Yes, I appreciate that but hadn't included it for simplicity.

zagfles

Zebra wrote: »

2. An annual allowance, currently £50,000, of pension savings, which is an increase in the value of the pension and is approximately the change in annual pension, corrected for inflation, and multiplied by 16.

Would appreciate some confirmation. Thanks.

Yes, though from April (next tax year) it will be £40,000. Though you can carry forwards the previous 3 year's unused allowances. Also note that the "pension input period" for your scheme doesn't necessarily align with the tax year - so it's possible payments now would be subject to the lower annual limit - ask your scheme administrators if you're not sure.

See http://www.hmrc.gov.uk/pensionschemes/understanding-aa.htm

Zebra

Thanks Zagfles.

jamesd

Zebra wrote: »

For a final salary pension scheme, there are two limits on tax relief that apply.

1. A limit to gross pension contributions, whether employee contributions, ARC's, AVC's and personal pension contributions up to 100% of gross earnings, being salary and investment income, but not rental income.

Is that correct? If so does it also include employers contributions?

Not correct, the limit isn't gross earnings, it's earned income that does not include investment income or rental income. Employer contributions to a pension scheme do not increase the limit.

Zebra wrote: »

2. An annual allowance, currently £50,000, of pension savings, which is an increase in the value of the pension and is approximately the change in annual pension, corrected for inflation, and multiplied by 16.

It's the increase in value calculation (times 16 etc.) for the defined benefit part. For the AVCs or personal pension parts it's the total of employer and employee money paid in.

There are three different things, each with different calculation rules:

1. Earned income limit on the amount on which you can get tax relief. It's usually PAYE income.
2. £50,000 limit. Which isn't a limit on tax relief but a calculation of when you have to start paying a penalty and how much the penalty will be.
3. How much tax relief you end up getting, which is based on all income, earned and unearned.

Calculate all three independently because otherwise the different things included in each will get confusing.