Technical question on the "basic" £3600 tax relief limit

zagfles

Someone asked me this question recently and I've ploughed through the HMRC pension tax manual but am still unclear as to the answer.

Someone retires part way through the tax year. They were in a public sector DB scheme contributing 10% of their earnings using the normal "net pay" arrangement (ie not sal sac).

They had earned £3000 in the tax year of which they'd paid £300 employee contributions to the DB scheme. So net taxable earnings of £2700.

Question - how much are they allowed to contribute to their SIPP (and get tax relief) in that tax year?

I can see arguments for 3 possible answers (gross figures):

1) £3600
2) £3300
3) Depends whether they use up their personal allowance (with non-relavant earnings eg pensions) or not. If not, then £3600 since they haven't had any tax relief on the £300 employee contribution. But if they have earnings over the PA, then just £3300 since they've had tax relief on the £300.

Which one is correct? I'm leaning towards 3) at the moment....

SnowMan

I would have assumed it is 2, but I can see why you might think it was 3. My assumption is that whether tax relief is obtained in practice on the £300 is irrelevant, it is still earnings on which tax relief could have been obtained if circumstances had been different.

If you think about someone whose only income is earning £10,000pa whose only employee pension contributions are £100pa paid through 'net pay' they simply don't get tax relief on that £100, and your scenario is just an extension of that inequity.

We can rule out 1.

The legislation is the Finance Act 2004 sections 188 - 193, you could try reading that

http://www.legislation.gov.uk/ukpga/2004/12/section/188

It is very hard to get clarity of understanding in this area so if anybody knows differently..........

There are some weird scenarios in this area. For example someone who earns £10,000 (no other income) who contributes their entire salary i.e. £10,000 (gross) through relief at source to their pension can get relief on the full payment so £2,000 of tax relief not just £720 (= £3,600 - £2,880). Many articles imply the maximum relief here is £720, but I'm fairly sure that is wrong.

bigfreddiel

Maybe this is true then:

Andy Haldane admitted this week that pensions were so complicated that even he could not make "the remotest sense" of them.


Cheers fj

zagfles

SnowMan wrote: »

I would have assumed it is 2, but I can see why you might think it was 3. My assumption is that whether tax relief is obtained in practice on the £300 is irrelevant, it is still earnings on which tax relief could have been obtained if circumstances had been different.

Indeed, but as it says here:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm041000

There is a limit on the amount of tax relief a member may receive on contributions paid by them, or other persons in respect of them. Any contributions over the tax relief limit may still be paid into the pension scheme, but no tax relief is due on the excess

But it doesn't say which would count as the excess if there are two types of contribution. The DB scheme, the RAS scheme, or whichever was contributed to last?

For instance the member could argue "the excess" is the contribution the DB scheme, and forgo the tax relief on that. Which wouldn't cost them anything if they had spare PA!

The legislation seems to be no help with this either. Although as you say it does seem to rule out (1).

If you think about someone whose only income is earning £10,000pa whose only employee pension contributions are £100pa paid through 'net pay' they simply don't get tax relief on that £100, and your scenario is just an extension of that inequity.

We can rule out 1.

The legislation is the Finance Act 2004 sections 188 - 193, you could try reading that

http://www.legislation.gov.uk/ukpga/2004/12/section/188

It is very hard to get clarity of understanding in this area so if anybody knows differently..........

There are some weird scenarios in this area. For example someone who earns £10,000 (no other income) who contributes their entire salary i.e. £10,000 (gross) through relief at source to their pension can get relief on the full payment so £2,000 of tax relief not just £720 (= £3,600 - £2,880). Many articles imply the maximum relief here is £720, but I'm fairly sure that is wrong.

Yes the legislation does at least make that clear - 190(1).

RickyB2000

Isn't the amount contributed something like the annual increase in DB scheme x 16? Not the £300?

Isn't it contribution to a pension scheme regardless of whether you get tax relief to or not?

HappyHarry

Question - how much are they allowed to contribute to their SIPP (and get tax relief) in that tax year?

Annual allowance calculations for a DB pension is not equal to the contribution made by the employee.

The calculation is based on the amount of accrual above the rate of inflation.

You should be able to contribute to a DC pension the gross of £3600 less the DB accrual amount.

Your pension administrators should be able to give you some information about the amount accrued in your DB pension.

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

Andy Haldane admitted this week that pensions were so complicated that even he could not make "the remotest sense" of them.

Andy Haldane is making a point about how complex pensions can be. For the majority of situations, they are fairly straightforward. For this example, they are clearly not so.

zagfles

RickyB2000 wrote: »

Isn't the amount contributed something like the annual increase in DB scheme x 16? Not the £300?

No, we're talking about the tax relief limit (3600/100% of earnings).

Not the annual allowance, which is a completely separate and unrelated limit, and which is as you describe.

RickyB2000

Actually, now I think about it, you are correct in the sense that if they did not get any tax relief on the money they paid in, then the should have the full £3600 left. After all, there is nothing stopping them exceeding this amount, they just don't get the tax relief. So either the £300 gets tax relief and reduces you to £3300 or it didn't and you can either try and claim tax relief on that £300 or you can contribute the full amount. At least in a DC scheme.

The question then is does paying into a DB scheme automatically treat you as having tax relief if your original contribution didn't receive any?

zagfles

HappyHarry wrote: »

You should be able to contribute to a DC pension the gross of £3600 less the DB accrual amount.

Definitely wrong - I suspect you meant £3600 less employee DB contributions?

RickyB2000

zagfles wrote: »

No, we're talking about the tax relief limit (3600/100% of earnings).

Not the annual allowance, which is a completely separate and unrelated limit, and which is as you describe.

So in which case, 3 is correct. If they got tax relief on the £300 with pensionable earnings below £3600, then £3600-300-tax relief. If they didn't then £3600.

RickyB2000

zagfles wrote: »

No, we're talking about the tax relief limit (3600/100% of earnings).

Not the annual allowance, which is a completely separate and unrelated limit, and which is as you describe.

So in which case, none are correct but 3 is closest. If they got tax relief on the £300 with pensionable earnings below £3600, then £3600-300-tax relief. If they didn't then £3600.