Final Salary Pension and Annual Allowances

seaniow

I'm lucky enough to be in a final salary pension scheme and have recently been advised by the company pension administrator that I have gone over the £40,000 annual allowance. Basically my salary was increased by £10k following a promotion and my pension calculation will have gone up on the previous year by £4723 a year, multiplying this number by a government factor of 16 gives a figure of £75,561, £35,561 more than the £40k cap.
I am not a super high earner although I do creep into the 40% tax bracket. It would appear that my £10k pay award is not only being taxed through PAYE this year losing over £4k of my salary but I will also have to pay another £14k in tax (40% tax on £35k this year). In essence a £10k pay award has cost me £18k this year. Please can someone tell me I am reviewing this correctly as it doesn't appear to be fair or right. I have no carry forward pension from previous years either as I have been saving in a SIPP.


Many thanks for reading.

kinger101

Do you have any unused annual allowance from previous years?

See the example 1 here;

http://bma.org.uk/support-at-work/pensions/restricting-pensions-tax-relief-2014

seaniow

Thank you very useful link. Unfortunately the previous 3 years were used in my Sipp.

Triumph13

I'm afraid you're unlikely to get much sympathy from those of us who don't have the luxury of a DB pension. Being handed a nearly £5k a year pension increase for life and then moaning about having to pay some tax on a tiny fraction of it's real worth is not going to have people up in arms on your behalf.

System

Hi

If the tax is more than £2,000

You can ask your pension provider to pay HMRC out of your pension pot if the tax is more than £2,000.
You must tell your pension provider before 31 July if you want them to pay the tax for the previous tax year. You’ll still need to fill in a Self Assessment tax return.
If you’re paying tax because you went over the lower allowance of £10,000, your provider can only pay it from your pot if you would have paid more than £2,000 tax based on the full annual allowance of £40,000 (plus unused allowance from the previous 3 tax years).

Rates

The amount you went above the annual allowance is added to your taxable income. You pay Income Tax on taxable income at the tax rate that applies to you.

kidmugsy

seaniow wrote: »

I'm lucky enough to be in a final salary pension scheme .... I have no carry forward pension from previous years either as I have been saving in a SIPP.

The lesson for other readers is, I suppose, that if you are in an FS scheme with reasonable hopes of a big pay rise or promotion, it may be unwise to spend your annual allowance on a SIPP. Admittedly they might need a crystal ball to know what is wise, and when, though as a rule of thumb I suggest that a SIPP is rarely a terribly good idea for someone who isn't a higher rate taxpayer and who is already in an FS scheme.

gadgetmind

seaniow wrote: »

Thank you very useful link. Unfortunately the previous 3 years were used in my Sipp.

Fully used? 2012/13, 2013/14 and 2014/15 all gave you £50k of allowance each year, and given what you've said about salary, you wouldn't have had enough taxable income to max out your annual allowance for each year.

MrStanners

Admittedly they might need a crystal ball to know what is wise, and when, though as a rule of thumb I suggest that a SIPP is rarely a terribly good idea for someone who isn't a higher rate taxpayer and who is already in an FS scheme.

Kidmugsy - Why is a SIPP a bad idea for a basic rate taxpayer already in an FS scheme? Is it it that you think a shares ISA is a better deal? But what if they've already maxed out their ISA, isn't a SIPP a good idea then for the tax relief?

Apologies to the OP, I realise this post is a bit off-topic. I hope you get more replies to your original question.

hyubh

gadgetmind wrote: »

Fully used? 2012/13, 2013/14 and 2014/15 all gave you £50k of allowance each year, and given what you've said about salary, you wouldn't have had enough taxable income to max out your annual allowance for each year.

Your general point is a reasonable one, however the AA for 2014/15 was 40K not 50K.

hyubh

seaniow wrote: »

Thank you very useful link. Unfortunately the previous 3 years were used in my Sipp.

You understand the AA for money purchase arrangements just concerns the contributions paid in, yes? In other words, there is no multiplier involved like for DB scheme benefits.

zagfles

hyubh wrote: »

Your general point is a reasonable one, however the AA for 2014/15 was 40K not 50K.

Yes, and even when the AA was £50k it's possible for OP to use it up if he was just in the 40% tax band before the promotion, eg on £45k the value of the PIP in a 1/60th FS scheme would be about £12k or so (when payrsie is about level with inflation), leaving £38k payable into a SIPP and using up the £50k AA.