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

xylophone

but I'm fairly sure that is wrong.

Indeed.

See http://www.taxation.co.uk/taxation/Articles/2015/05/05/333016/money-go-round

"Mabel’s husband is self-employed and pays her £6,000 a year to maintain his business records, prepare invoices and VAT returns, and deal with enquires at his office.

By ensuring that the work she carries out justifies a salary of more than the National Insurance lower earnings limit, Mabel maintains a contribution record so a full state pension should be payable on retirement.

Subject to the lifetime allowance and the drawdown condition, which is unlikely to trouble Mabel, a worker can make pension contributions up to the level of their earnings or the annual allowance (now £40,000), whichever is the lowest.

In the past, low paid workers may have felt that they had little to gain from making pension contributions. The young and single with limited financial resources will probably still feel this way, but the new flexi-pension regime may have more immediate and short-term attractions.

Mabel could also contribute £2,880 to a personal pension plan and draw down £3,600 a year later. Alternatively, she could contribute up to £6,000 gross to a personal pension plan. She would make a net contribution of £4,800, and the government adds £1,200."

zagfles

RickyB2000 wrote: »

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.

£300 is the gross contribution to the DB scheme regardless of whether they got tax relief on it or not.

So I think it's either 2 or 3, depending on where the "excess" counts.

RickyB2000

zagfles wrote: »

£300 is the gross contribution to the DB scheme regardless of whether they got tax relief on it or not.

So I think it's either 2 or 3, depending on where the "excess" counts.

But surely the important thing is whether they got tax relief? From the workplace pension site

"Under this arrangement if you don’t pay tax, you don’t get tax relief, for example because you earn less than the tax threshold."

So that suggests no tax relief has been applied. In which case option 1) is correct. They can still contribute and get tax relief on £3600. I guess the key way to look at it is they are allowed £720 tax relief. So when you take into account all sources of income etc, how much tax should they have paid without pension contributions, how much did they pay (or get back) as a result of pension contributions and is the difference equal to or less than £720? If less than, this tells you the amount of tax relief they can still claim.

EDIT option 3) is only correct if their income as an employee was being taxed as a result of being over the threshold from other sources, in which case they got the tax relief on the £300. If it was being taxed first (I.e. No tax taken) then no relief was received and they can still contribute the full £3600, as they would still have £720 tax relief available to them.

OldBeanz

If the earnings were all earned in one or 2 months then presumably they would have had tax relief through PAYE. If 3 months some; if over 3 months then none. I see it as the same as pension lump payments in that the system assumes you will be paid the same each month. From that you can determine whether the payment(s) attracted tax relief. Total income would then determine whether he received a tax rebate or not.

jamesd

There are two limits to contributions and both must be complied with:

1. The annual pension contribution allowance. This is £40,000 though carry-forward from the past three years for unused amounts is available if a person was in a pension scheme. Employer contributions count towards this limit. For a defined benefit pension the amount is the increase in value of the pension, not the amount paid in by the employee or employer.

2. The earned income in the tax year or £3,600 gross if that is higher. Employer contributions do not count against this limit. It is irrelevant whether this is taxed, it just has to be earned.

So:

£300 employee contributions to the defined benefit scheme. Counts as £300 for 2 but for 1 it's the increase in value that matters, so the value for that won't be £300. I'm assuming that this is the gross value, that is that it is declared on a payslip as income and deducted either before or after tax is deducted. If it's salary sacrifice it's an employer contribution and doesn't count for 2, just 1.

£3,000 pay is lower than £3,600 so £3,600 gross is the limit for 2. Deduct the £300 to the DB scheme and £3,300 remains available for use. Answer 2. Net contribution available is 80% of that £3,300 because basic rate tax relief will be added. That's true even if the income was untaxed and is entirely legal.

A person who is between 55 and 75 years old with 2700 of unused personal allowance can pay in £3,600 gross a year of total contributions then take benefits to get £720 of tax gain each year:

A. pay in 2880 net, it's grossed up to 3600.
B take out 3600 UFPLS lump sum, 25% tax free and 75% taxable but not tax due because it's all covered by personal allowance that's available, uses 2700 of personal allowance. tax gain of 3600 - 2880 = 720.
C. the pension provider is required to deduct income tax. Reclaim the income tax using a form available via the Personal Tax Account online that everyone has. HMRC service target for this is 30 days from receiving the claim to paying.

Drawdown can be used instead of UFPLS, for example you might take a law income in the first few months to give time for HMRC to get a tax code to the pension firm so they don't have to use the month 1 code. If you want a steady income you could set it to pay 2700 / 12 monthly payments. Or divide by 13 if you have a provider who will charge you for an account that is open for less than a year. In this case too much tax will be taken in the first month but the tax code will cause it to be repaid. You can use the Personal Tax Account to tell HMRC about your anticipated income for the year so they get the tax code right. Remember that the taxable pension income has to be declared, the 2700 part.

RickyB2000

jamesd wrote: »

There are two limits to contributions and both must be complied with:

1. The annual pension contribution allowance. This is £40,000 though carry-forward from the past three years for unused amounts is available if a person was in a pension scheme. Employer contributions count towards this limit. For a defined benefit pension the amount is the increase in value of the pension, not the amount paid in by the employee or employer.

2. The earned income in the tax year or £3,600 gross if that is higher. Employer contributions do not count against this limit. It is irrelevant whether this is taxed, it just has to be earned.

So:

£300 employee contributions to the defined benefit scheme. Counts as £300 for 2 but for 1 it's the increase in value that matters, so the value for that won't be £300. I'm assuming that this is the gross value, that is that it is declared on a payslip as income and deducted either before or after tax is deducted. If it's salary sacrifice it's an employer contribution and doesn't count for 2, just 1.

£3,000 pay is lower than £3,600 so £3,600 gross is the limit for 2. Deduct the £300 to the DB scheme and £3,300 remains available for use. Answer 2. Net contribution available is 80% of that £3,300 because basic rate tax relief will be added. That's true even if the income was untaxed and is entirely legal.

A person who is between 55 and 75 years old with 2700 of unused personal allowance can pay in £3,600 gross a year of total contributions then take benefits to get £720 of tax gain each year:

A. pay in 2880 net, it's grossed up to 3600.
B take out 3600 UFPLS lump sum, 25% tax free and 75% taxable but not tax due because it's all covered by personal allowance that's available, uses 2700 of personal allowance. tax gain of 3600 - 2880 = 720.
C. the pension provider is required to deduct income tax. Reclaim the income tax using a form available via the Personal Tax Account online that everyone has. HMRC service target for this is 30 days from receiving the claim to paying.

Drawdown can be used instead of UFPLS, for example you might take a law income in the first few months to give time for HMRC to get a tax code to the pension firm so they don't have to use the month 1 code. If you want a steady income you could set it to pay 2700 / 12 monthly payments. Or divide by 13 if you have a provider who will charge you for an account that is open for less than a year. In this case too much tax will be taken in the first month but the tax code will cause it to be repaid. You can use the Personal Tax Account to tell HMRC about your anticipated income for the year so they get the tax code right. Remember that the taxable pension income has to be declared, the 2700 part.

So are you saying even though the £300 did not receive any tax relief at source (on the payslip) nor any relief in the scheme itself it still counts towards the total amount you can pay in and receive tax relief on? Even though it never received any? Obviously if it did at any point then it does count but I would have thought it is the £720 extra in your pocket that is key, not the amount paid in. If you paid in another 3600 that is fine by the total relief cannot exceed £720 across all schemes

zagfles

RickyB2000 wrote: »

But surely the important thing is whether they got tax relief? From the workplace pension site

"Under this arrangement if you don’t pay tax, you don’t get tax relief, for example because you earn less than the tax threshold."

So that suggests no tax relief has been applied. In which case option 1) is correct. They can still contribute and get tax relief on £3600. I guess the key way to look at it is they are allowed £720 tax relief. So when you take into account all sources of income etc, how much tax should they have paid without pension contributions, how much did they pay (or get back) as a result of pension contributions and is the difference equal to or less than £720? If less than, this tells you the amount of tax relief they can still claim.

EDIT option 3) is only correct if their income as an employee was being taxed as a result of being over the threshold from other sources, in which case they got the tax relief on the £300. If it was being taxed first (I.e. No tax taken) then no relief was received and they can still contribute the full £3600, as they would still have £720 tax relief available to them.

Sort of agree. But if "other income" exceeds the PA then it makes no difference whether the employee income was taxed at the time or not - in the year end tax calculation the employment income (P45) would show £2700, if this is then added to (say) £10,000 pension income, then the tax calculation would use a total income of £12,700, not £13,000.

So tax relief would have been given on the £300, so they'd need to "fess up" and admit they've had tax relief on £3900 of pension conts. It wouldn't make any difference whether they'd over-contributed to the SIPP or the employment pension, they'd have to pay back tax relief on £300 ie £60 (or ask the SIPP for a refund of the £300, £240 net).

ie option 3.

zagfles

jamesd wrote: »

There are two limits to contributions and both must be complied with:

"must" is too strong...it's perfectly legal to exceed the 100% earnings/£3600 limit - it's just you're not entitled to tax relief on the excess.

1. The annual pension contribution allowance. This is £40,000 though carry-forward from the past three years for unused amounts is available if a person was in a pension scheme. Employer contributions count towards this limit. For a defined benefit pension the amount is the increase in value of the pension, not the amount paid in by the employee or employer.

2. The earned income in the tax year or £3,600 gross if that is higher. Employer contributions do not count against this limit. It is irrelevant whether this is taxed, it just has to be earned.

So:

£300 employee contributions to the defined benefit scheme. Counts as £300 for 2 but for 1 it's the increase in value that matters, so the value for that won't be £300. I'm assuming that this is the gross value, that is that it is declared on a payslip as income and deducted either before or after tax is deducted. If it's salary sacrifice it's an employer contribution and doesn't count for 2, just 1.

£3,000 pay is lower than £3,600 so £3,600 gross is the limit for 2. Deduct the £300 to the DB scheme and £3,300 remains available for use. Answer 2. Net contribution available is 80% of that £3,300 because basic rate tax relief will be added. That's true even if the income was untaxed and is entirely legal.

Agreed. But the point is, as it's perfectly OK to exceed the £3600 and pay £3900 in if you want, and just forgo tax relief on £300 of it, how would that work? Just tell HMRC you don't want the tax relief on the DB pension cont?

RickyB2000

Yes, though they would need to be £3600 plus £300 above the PA allowance. Though it does depend on how they were taxed and how they report it. If they were taxed on the full £13,000 up front and only claimed tax relief off the £3,600 in the SIPP and then don't report £12,700 as their income for the year then they should be good right? As they have paid the tax on the £300.

jamesd

RickyB2000 wrote: »

So are you saying even though the £300 did not receive any tax relief at source (on the payslip) nor any relief in the scheme itself it still counts towards the total amount you can pay in and receive tax relief on? Even though it never received any?

Yes.

RickyB2000 wrote: »

I would have thought it is the £720 extra in your pocket that is key, not the amount paid in.

It is the amount paid in.

Though as zagfiles has correctly noted you can pay in more than 3600 if you don't mind not getting tax relief on the extra. I don't know how that would treat your 300 paid into the work scheme, though. It may allow you to pay all 2880 into a personal pension since the 300 didn't get any relief, meaning that you'd have received the correct amount of relief for the total amount paid in. That would be logical but I suggest checking with HMRC or a pension scheme before doing it.