Investing more than income in Sipp?

SeniorSam

I understand that 'income' refers to earned income not income and pension income when calculating the amount that tax will increase the investment into a Sipp. Also that is is in respect of the tax year's income.

If the investment is above the actual earned income, then additional tax increase of 20% for basic rate taxpayer would not be allowed, but adding more to the Sipp would still allow the tax free cash withdrawal upon crystalisation. Is that amout still restricted to the past three years earned income or is the limit £40,000 even if earned income in that period was not as high as that?

Some clarification would be appreciated.

jamesd

HMRC will reclaim the tax relief on the excess. This means that the tax free lump sum delivers no benefit because you will have paid HMRC money from outside the pension but have money inside the pension. All the lump sum would do is return this to you, it won't deliver any tax gain.

SeniorSam

Thanks James, I appreciate that there would be no tax gain if investing more than the present years actual income, but if using the carry forward for the last 3 years income when no earlier pension contribution was made, does that mean that when crystalising and taking the TFLS, that allowance would be reduced?

I have the answer now, Thanks.
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