Annual Allowance tax charge for non tax payer

The_Doc

My wife was a non-tax payer at the beginning of the tax year 2016/17 and was not expecting to get a job. So she put the £2880 into a SIPP and received the tax uplift to take it to £3600.

However, she then got a part time job (one day/week) and she (via net pay) and her employer make contributions into the employer's scheme (LGPS). Her gross income in this tax year will be approx £2000.

I was wondering if she will now be liable to a Annual Allowance tax charge and if so how this would be calculated.

Any help appreciated.

The_Doc

jamesd

No annual allowance issue but HMRC will tell her to repay the income tax relief on the amount that is over 3600 gross, including the value of the LGPS contributions. Just let HMRC know once you know the combined value and they will sort it out without any fuss or penalties.

The_Doc

Thanks, Jamesd.

I assume her Self Assessment would take care of that?

During my research, I discovered that the excess over her pension input AA would be added to her taxable income and thus charged at her marginal rate. Is that correct? And is that the reason why she would have no additional tax charge over and above rebating the tax relief she has received?

If that is the case, what would prevent my wife from adding more (from savings) into the pension pot (getting relief at source) and then repaying it via self assessment as long as the excess doesn't take her over her personal allowance and thus incur income tax?

The reason why I may want to do that is I intend to use this pension pot as an inheritance. If my wife dies (after me) and before 75, then no tax would be chargeable. Otherwise, tax would be charged at the beneficiaries marginal rate if the beneficiary takes it as income, which hopefully will be less than or equal to the 40% IHT. I was just thinking of ways to move more of our estate into IHT free zone. Doing that every year would help reduce a future IHT bill.

The_Doc

jamesd

The annual allowance is £40,000 so it's irrelevant for her situation. Her having unused personal allowance is also irrelevant.

Her limitation is only being eligible for tax relief on the higher of her qualifying income and £3,600 gross.

She cannot do as you suggested because she is ineligible for tax relief on more than £3,600 at her income level. All of the relief she receives above that will be reclaimed by HMRC.

Do not use the annual allowance entries on a tax return, they are not the ones that apply to her situation, they are for going over the annual allowance and she's far from doing that and entirely ineligible to go over it due to having insufficient qualifying income by some £38,000.

jamesd

Your plan could work if she had the qualifying income, but with just £2,000 of that it's just not viable.

Unless, that is, you were to see some benefit in making contributions with no tax relief just to get an inheritance tax benefit.

That also seems like a poor plan given that many AIM companies and other investments are excluded from inheritance tax. Perhaps there's a focus on pensions because you're not yet familiar with the other options for inheritance tax planning?

xylophone

If she will only earn £2000 this tax year from the Local Govt job and her contributions are being taken through net pay, then she won't be receiving any tax relief through the LGPS.

http://www.lgps.org.uk/lge/core/page.do?pageId=100827

zagfles

As said above, forget the annual allowance, that is totally irrelavent. Also the employer contributions/value of the DB scheme is totally irrelavent, the issue is her contributions to the LGPS which would mean she's contributed over £3600 to pensions, and as her earnings are below £3600, that means she's not entitled to tax relief on above £3600 of contributions.

However, she's not had tax relief on her contributions to the LGPS (assuming she doesn't have unearned income that would have taken her above the personal allowance). So it could be argued that she's only had tax relief on £3600 and so all it well. But I don't know how HMRC would see it, as her taxable earnings from the job will be reduced by the pension conts.

We discussed this in a previous thread but there was no definite conclusion: https://forums.moneysavingexpert.com/discussion/5468797