Low income tax relief pension contribution query

iceman101

My annual salary for this year will be 7k, am I limited to tax relief on £2800 or up to 7k, if I made a contribution of 7k into my pension fund?

kidmugsy

Up to all £7k, but remember you contribute 80% of that and the pension provider claims back the missing 20% from HMRC and adds it to your "pot".

The fact that you may not have paid any income tax on the £7k just adds to your glee. The Treasury presumably hopes that you will be paying income tax when you finally withdraw the money from the pension.

iceman101

Thanks for the confirmation, that was my understanding which is contrary to the reply received from my pension provider. They said even though I earned income, because I was a non-tax-payer then the maximum tax relief was limited to £2800.

dunroving

iceman101 wrote: »

Thanks for the confirmation, that was my understanding which is contrary to the reply received from my pension provider. They said even though I earned income, because I was a non-tax-payer then the maximum tax relief was limited to £2800.

Actually, the wording on HMRC pages is very ambiguous, and could easily be misinterpreted as meaning the above (I'll see if I can find the text I was reading just the other day) but as KidsMugsy said, you get tax relief on the whole £7k.


ETA - on this page:


https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief


It says:


" If you don’t pay Income Tax


You still automatically get tax relief at 20% on the first £2,880 you pay into a pension each tax year (6 April to 5 April) if both of the following apply to you:


you don’t pay Income Tax, eg because you’re on a low income


your pension provider claims tax relief for you at a rate of 20% (relief at source)"


- as I said, very ambiguous.

iceman101

Thanks dunroving, I agree with you, HMRC is ambiguous on this point and I would like a definitive answer.

xylophone

http://adviser.royallondon.com/technical-central/information-guidance/contributions-and-tax-relief/member-contributions-tax-relief-and-annual-allowance/

Tax relief is calculated in tax years. In any tax year tax relief is only given on gross contributions of up to £3,600 or 100% of relevant UK earnings, whichever is the higher. Looking at two examples, a member with no relevant UK earnings can get tax relief on a contribution of up to £3,600 whereas a member with relevant UK earnings of £25,000 can receive tax relief on contributions up to £25,000.

What are relevant UK earnings?
In short this is:

employment income,
self-employed income,
income from patent rights,
certain redundancy payments,
earnings from overseas crown employment.
This means that salary counts as relevant UK earnings, but investment income and dividends don't. This can have implications for controlling directors in deciding whether to make a pension contribution as a member or an employer contribution."

http://www.thepensionsregulator.gov.uk/employers/about-stakeholder-pensions.aspx

"There is no limit to the amount that can be invested in a stakeholder pension scheme. However, tax relief can only be obtained on contributions up to a maximum annual contribution limit (known as an individual’s ‘annual allowance’). For the tax year 2013/14, this is set at the lower of 100% of an individual's UK earnings or £50,000 per annum (£40,000 from 2014/15) – carry forward of unused allowances may be permitted in some circumstances. It is possible to contribute up to £3,600 per year (including tax relief) into a stakeholder pension scheme even if a person is not earning."


Use this calculator http://www.hl.co.uk/pensions/interactive-calculators/tax-relief-calculator

As an example, I put £10000 into each box and got:

"Your results (basic rate or non tax payer)

To make a gross pension contribution of £10,000.00 you only need to pay £8000 - the government will contribute tax relief of £2000."

xylophone

And from http://www.accountingweb.co.uk/anyanswers/tax-relief-personal-pension-contributions-low-earner




"Your client may invest up to the total of their earnings (before deduction of personal allowance) in a pension scheme but will pay this net of basic rate tax. In your example where the earnings are £6K, she can make pension contributions of up to £6K gross (£4,800 net) and HMT will add £1,200 to her pension pot and she will pay no tax.

Your client may make a net contribution of £2,880 and HMT will add £720, whether or not she has any earnings.

Incidentally the relief is given by extending the basic rate band rather than but deducting the amount from earnings."

jamesd

Well, if you really want definitive, you can read the Finance Act 2004 section 188 through 190 and unlike some legislation it's not unduly impenetrable.

iceman101

xylophone wrote: »

Use this calculator hl.co.uk/pensions/interactive-calculators/tax-relief-calculator

As an example, I put £10000 into each box and got:

"Your results (basic rate or non tax payer)

To make a gross pension contribution of £10,000.00 you only need to pay £8000 - the government will contribute tax relief of £2000."

Thank you xylophone for your detailed explanation. According to the calculator, as a non-tax payer, I can make a net contribution of £5,600 and receive 20% tax relief on top, but anything above this amount I would not receive any further tax credit. At least I can contribute more than £2880 and gain further tax relief, which is more than I was informed by the pension provider.

iceman101

jamesd wrote: »

Well, if you really want definitive, you can read the legislation.gov.uk/ukpga/2004/12/section/188"]Finance Act 2004 section 188 through 190 and unlike some legislation it's not unduly impenetrable.

Thanks jamesed, the info may be definitive, but it was clear as mud to me!

Mirador

Still confused:eek: .

So say my monthly gross is £1500 and I ask my employer to put the whole amount in to my pension fund. Take home pay = £0

I am then given tax relief of £4500 so the total into my fund for the year is now £22500 plus any employer contributions.

Is that okay?

If not and I go ahead and do it anyway, what are the consequences? Can I just put the figures on my tax return and repay any excess tax relief if it is necessary?