Maximising Tax Relief on Pension Contributions

super_reds

Hi

For 2014/15 I am in quite a fortunate position of having a spare bit of cash knocking about and want to maximise the amount I put into my pension.

I have made minimal contributions during 2014/15 and the previous couple of years. My gross income for 2014/15 will be c£82k, my personal allowance will be c£12k. This has been earnt and paid to date, with the tax paid over via PAYE, my taxable income for the rest of the tax year will be nil.

So I was thinking I should be aiming to put £70k into my pension, does that involve writing a cheque for £70k or for £52.5k. What would I put on my self assessment tax return?

Thanks in advance.

enjoyyourshoes

Hi

annual allowance for max pension contributions receiving tax relief is 2014/15 £40K.

Also max pension pot is £1.25 M

Might be worth checking if rules applies to your specific situation

HarryD

Do you want to put all that into your pension? Certainly, that which you would pay 40% tax on makes sense. I think getting 20% relief is of marginal benefit assuming you will be a 20% tax payer in retirement. (And if you might be a 40% taxpayer in retirement it would make no sense at all.)

Putting the 40% taxable bit into a SIPP and £15K into a S&S ISA might be an idea. Particularly so if you might in the future hit the LTA limit: contributing at 20% tax relief now which then prevents you contributing with 40% tax relief later might not be so good.

You put the gross amount of SIPP contributions on your self assessment.
.

DaveMcG

super_reds wrote: »

So I was thinking I should be aiming to put £70k into my pension, does that involve writing a cheque for £70k or for £52.5k. What would I put on my self assessment tax return?

Thanks in advance.

As enjoyyourshoes said - there are limits to consider. You write the cheque for an amount less 20% tax relief so a cheque for an £8k contribution will be grossed up to £10k by the pension company when they receive the relief from HMRC. If you are 40% taxpayer, you can claim the other 20% from HMRC via your tax return.

super_reds

enjoyyourshoes wrote: »

Hi

annual allowance for max pension contributions receiving tax relief is 2014/15 £40K.

Also max pension pot is £1.25 M

Might be worth checking if rules applies to your specific situation

Unfortunately I'm in no danger of breaching the £1.25m limit

I have made minimal contributions in 2013/14 and the three previous tax yrs so thought that provided I had enough earned income I could carry back contributions into those earlier tax years? This was why I was considering putting £70k in.

super_reds

HarryD wrote: »

Do you want to put all that into your pension? Certainly, that which you would pay 40% tax on makes sense. I think getting 20% relief is of marginal benefit assuming you will be a 20% tax payer in retirement. (And if you might be a 40% taxpayer in retirement it would make no sense at all.)

Putting the 40% taxable bit into a SIPP and £15K into a S&S ISA might be an idea. Particularly so if you might in the future hit the LTA limit: contributing at 20% tax relief now which then prevents you contributing with 40% tax relief later might not be so good.

You put the gross amount of SIPP contributions on your self assessment.
.

Thanks for your response, not sure I'll ever hit the limit, would be a nice problem to have

I'm unlikely to be a 40% tax payer in retirement, I would sooner retire earlier on a reduced amount if that makes sense.

I figured that given I had already 'spent' the tax and so the only way of getting it back and thus giving my pension pot a boost would be sensible. Will have maxed out the ISA's for 2014/15 and 2015/16 as part of my planning for both me and my spouse, but I should probably have made that clear in my original post.

So in the case where I try and minimise 2014/15 tax I would write a cheque for £56k, pension provider would top up via HMRC to £70k and I would enter that on my SA return and wait for the refund from HMRC?

enjoyyourshoes

Hi

there are specific conditions that allow 'carry forward' of allowances. Might be worth googling it and applying your situation to those conditions.

Super_reds ? (Oxymoron)
Super_blues more like especially 98/99 season !

HarryD

super_reds wrote: »

So in the case where I try and minimise 2014/15 tax I would write a cheque for £56k, pension provider would top up via HMRC to £70k and I would enter that on my SA return and wait for the refund from HMRC?

Yes.

Then, let's assume you have paid 40% tax on £40K of the £70K: you'll get 20% of that, £8K, back from the tax man when you do your tax return.

Or, when you have made the £70K contribution (or are sure you are going to) you can write to HMRC now telling him you're putting £70K into a SIPP this tax year and they might adjust your tax code so you get the £8K refund in this tax year. Not sure about that though, might be worth ringing the HMRC helpline.

FatherAbraham

super_reds wrote: »

For 2014/15 I am in quite a fortunate position of having a spare bit of cash knocking about and want to maximise the amount I put into my pension.

Maybe, maybe not. Not if doing so would reduce your ability to get lots of 40% tax relief in the next tax year.

super_reds wrote: »

I have made minimal contributions during 2014/15 and the previous couple of years. My gross income for 2014/15 will be c£82k, my personal allowance will be c£12k. This has been earnt and paid to date, with the tax paid over via PAYE, my taxable income for the rest of the tax year will be nil.

So I was thinking I should be aiming to put £70k into my pension

Maybe a better strategy is to make steady contributions from your top tax slice each year.

I do disagree with the idea from another respondent that tax relief at 20% is worthless for someone paying basic-rate tax in retirement. For a start, that overlooks the 25% tax-free aspect of pensions, meaning money which is relieved at 20% will be effectively taxed at 15%. Furthermore, the effective tax rate may be even lower, because some pension income may fall into the 0% band (technically the personal allowance).

ISAs-for-retirement are a tax trap for higher-rate tax-payers who get their sums wrong. Instead of getting 40% tax relief and paying 15% tax later, they pay 40% tax now. Daft.

Warmest regards,
FA

HarryD

FatherAbraham wrote: »

I do disagree with the idea from another respondent that tax relief at 20% is worthless for someone paying basic-rate tax in retirement. For a start, that overlooks the 25% tax-free aspect of pensions, meaning money which is relieved at 20% will be effectively taxed at 15%. Furthermore, the effective tax rate may be even lower, because some pension income may fall into the 0% band (technically the personal allowance).

ISAs-for-retirement are a tax trap for higher-rate tax-payers who get their sums wrong. Instead of getting 40% tax relief and paying 15% tax later, they pay 40% tax now. Daft.

Actually I didn't say worthless, I said marginal for a person who is now and will be in retirement a 20% taxpayer. Particularly if you might later reach the LTA, see next para.

I said one should put 40% taxable income into a SIPP. I also pointed out that if contributing to a SIPP with 20% relief now would prevent you contributing in later years at 40% relief (because of the LTA), it would not be a good thing to do.

SW17

super_reds wrote: »

Unfortunately I'm in no danger of breaching the £1.25m limit

I have made minimal contributions in 2013/14 and the three previous tax yrs so thought that provided I had enough earned income I could carry back contributions into those earlier tax years? This was why I was considering putting £70k in.

You can carry forward unused allowance from a max of 3 years prior to the current tax year, but there are a few rules. The 2 most important are that you must have been a member of an HMRC-recognised UK pension scheme during that time (even if you didn't contribute), and the total amount you pay in during this tax year (including allowances carried over) cannot exceed your earnings in this tax year. The below links will give more info.

http://www.hmrc.gov.uk/tools/pension-allowance/

http://www.hl.co.uk/__data/assets/pdf_file/0005/5844632/Annual-Allowance-and-Carry-Forward-Factsheet.pdf