Maximising Tax Relief on Pension Contributions

super_reds

FatherAbraham wrote: »

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



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

Thanks for the response, very helpful. I won't bore you with the detail but the next tax year and maybe one after that I am unlikely to be a higher rate tax payer. Also given I am a relatively late starter to a personal pension (have an old DB scheme) then am unlikely to run up against the £1.25m LTA.

super_reds

SW17 wrote: »

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

Thanks, presumably a bog standard UK based DB scheme qualifies for the HMRC recognised test?

If so my earnings for 14/15 will be c£82k so should be able to put £70k into pension and re-coup all of tax paid, one way or another.

jingleberry

This issues aired within this thread are relevant to me so I'm posting here rather than starting a new thread. I hope this is OK.


I retired in 2008 and am lucky enough to have a final salary pension which pushes me into the 40% tax band. I've just started a casual position with a local school and expect to be earning about £1000 pa gross. As I will be paying 40% tax on my entire earnings, I was thinking of investing 100% of my earned income in a pension and I would be very grateful if the good people on this forum would check my thinking and put my hat on straight if I've misunderstood anything.


I appreciate that I would only really be postponing the 40% tax payable on my earned income until I came to withdraw from the pension, so if I'm still paying 40% tax by then, I wont have achieved very much. On the other hand, one major point in favour of my plan is that I'll have the 25% tax free lump sum. The downside is the hassle of having to set up a new SIPP, pay the ongoing fees, complete a tax return each year to reclaim the higher rate tax, and be a hostage to possible future changes in the pension rules, for a relatively small benefit.


When I started to draw it, I was advised that my final salary scheme only uses up 56% of my lifetime allowance. I assume this figure never changes so I don't think I need to worry about lifetime allowance.


It occurs to me that I could contribute more than my £1000 gross salary to the pension each year if spare cash was available, taking advantage of the £3600 gross allowance for pension contributions for non-earners.


Any thoughts, ideas or pointers would be very much appreciated

HarryD

jingleberry wrote: »

I retired in 2008 and am lucky enough to have a final salary pension which pushes me into the 40% tax band.
...
It occurs to me that I could contribute more than my £1000 gross salary to the pension each year if spare cash was available, taking advantage of the £3600 gross allowance for pension contributions for non-earners.

Any thoughts, ideas or pointers would be very much appreciated

You could indeed contribute £3600pa. However, as you suggest, the benefit is really that you can then take 25% of it out tax free, saving you (if my sums are right) £360 a year.

I am in the same position but I don't bother to do it. As you say, the fees (let alone the hassle) make it all a bit marginal.

If you don't already, I'd suggest you should be moving £15,000pa into a stocks and shares ISA to protect the dividend income from higher rate tax, and to protect from CGT.

jingleberry

Thanks for your useful reply HarryD

jamesd

super_reds wrote: »

the next tax year and maybe one after that I am unlikely to be a higher rate tax payer

This reinforces the earlier suggestion that you should put the higher rate portion into a pension but not any basic rate portion. The reason is that at least one well known political party likes the idea of providing 30% income tax relief on all pension contributions. Which means that delaying basic rate contributions could get you more tax relief.