Pension tax relief questions

Tom2023

Hi

I am a higher rate tax payer and I am about to get my company pension but will continue to work. The pension will be around £20k a year.

As I'm on PAYE I don't get asked to fill in tax returns.

To stop my entire pension being taxed at 40% I thought I could invest the £20k pa until I stop work into a money purchase scheme and take it out as and when I need it during retirement.

My employers will not pay the money directly from my wages. Do I understand the tax relief correctly?

I would pay 40% tax on the £20k which would reduce it down to £12k or £1k a month which I would pay into the scheme from my bank account.

HMRC would then top up this £1k a month with £200 (20% tax relief)

I would then claim the rest of the tax relief via an online form?

Is there anyway I can get the rest of the tax relief paid into my pension monthly?

Thanks in advance for any advice.

jem16

Tom2023 wrote: »

HiI would pay 40% tax on the £20k which would reduce it down to £12k or £1k a month which I would pay into the scheme from my bank account.

Yes.

HMRC would then top up this £1k a month with £200 (20% tax relief)

With a net payment of £1kpm it would be topped out by £250 as it's 20% of the gross or 25% of the net.

I would then claim the rest of the tax relief via an online form?

You either claim by using SA or by phoning HMRC who can adjust your tax code so that less tax would be taken off in the first place.

Is there anyway I can get the rest of the tax relief paid into my pension monthly?

You could then pay it into the pension yourself but that gets a bit convoluted. Best way is to pay the net amount of £1333.33pm. That would then get grossed up to £1666.66pm and you would get the rest of the tax relief back.

If your tax code was adjusted it would make it easier as you would be able to pay the higher amount as you'll get the tax relief at the time.

Tom2023

Many thanks for the advice.

beansy

Just wondering, what would happen in the case that someone such as TomTom hadn't taken any money from their pension and decided to invest £20K into a new money purchase scheme and then towards the end of that tax year they decided to take a tax free lump sum from the pension pot?

Would this be allowed?

Thank you

jamesd

Yes, it's allowed for a person aged 55 or older and subject to the HMRC limits on recycling of pension lump sums.

The easiest of those limits is not to take more than £7,500 of tax free lump sum in each rolling 12 month period (not tax year, 12 months).

Alternatively if pension contributions didn't increase by more than 30% of the lump sum value in the two tax years before taking the lump sum, the year of taking it and the following two tax years combined it'd be OK.

beansy

Hi James

Thanks for your reply. However, I must be a bit thick as I am not sure how to interpret your statement below? Have I got this right please?

Yes, it's allowed for a person aged 55 or older (ok) and subject to the HMRC limits on recycling of pension lump sums.

The easiest of those limits is not to take more than £7,500 of tax free lump sum in each rolling 12 month period (not tax year, 12 months) I didn't realise this, thank you.


Alternatively if pension contributions didn't increase by more than 30% of the lump sum value (using the above illustration would this mean the £7500 tax free LS) in the two tax years before taking the lump sum, the year of taking it and the following two tax years combined (ie £2250 x 2, £2250 x 1, £2250 x 2) it'd be OK.

So in my case, as previously mentioned I claimed my DB pension at the beginning of December 2012 but my AVC is paid up and I have not taken any funds out of this to date.

Until receiving some of the suggestions/advice from my previous post I didn't appreciate that I could contribute to a new pension scheme (or money purchase scheme) and as I am still working this seems like a sensible option for me to consider since I am being taxed on the majority of the wages that I earn.

Thank you

kidmugsy

Tom2023 wrote: »

Hi
Do I understand the tax relief correctly?

I would pay 40% tax on the £20k which would reduce it down to £12k or £1k a month which I would pay into the scheme from my bank account.

HMRC would then top up this £1k a month with £200 (20% tax relief)

I would then claim the rest of the tax relief via an online form?

It depends on whether you want to avoid tax on all the pension income or only on part of it, and also whether you want to avoid 40% tax on the part of your salary above the 40% threshold. Let's assume just the former.

You want to avoid 40% tax on the gross £20k p.a. So you pay into a pension 80% of that = £16k p.a. The provider claims £4k p.a. from the taxman and adds it to your "pot". Meantime you claim back from the taxman for yourself a further £4k p.a. (You can even try doing it by phone.)

The upshot is that you've parted with £16k p.a. but had £4k p.a. back from the taxman, = £12k p.a. out-of-pocket. And there's now £20k p.a. in the pot. Job done.

jamesd

beansy wrote: »

Alternatively if pension contributions didn't increase by more than 30% of the lump sum value (using the above illustration would this mean the £7500 tax free LS) in the two tax years before taking the lump sum, the year of taking it and the following two tax years combined (ie £2250 x 2, £2250 x 1, £2250 x 2) it'd be OK.

The amount doesn't have to be £7,500. That's just one of the possible rules you can use to avoid being affected - if you take out no more than that in any rolling twelve month period the other limit mentioned in this paragraph does not apply.

If you were instead to take a tax free lump sum worth £10,000 you couldn't rely on the £7,500 rule. Instead, one of your options would be to rely on the increase of no more than 30% in contributions over five years rule.. This is based on the total increase over all five years combined being no more than 30% of the lump sum, so no more than an extra £3,000 if the lump sum amount is £10,000.

In the case of just £10,000 it wouldn't make sense to plan to rely on this rule because the £7,500 rule would allow far more recycling just by staggering the lump sums once per year at £7,500 a time. That £7,500 rule makes more sense until 30% of the lump sum is at least three times the £7,500. So 30% would be £22,500 and the whole lump sum would be £75,000.

However if you did take £10,000, the total increase allowed over the five years would be £3,000. So an average of £3,000 / 5 = £600 a year of increase.

beansy

Thanks James

I understand now and can see the benefit of making smaller annual payments from a couple of angles.

Much appreciated.

:beer: