Tax relief on pension contributions.

JOHN232

I am in receipt of an occupational pension of £21000 a year.
In this current tax year, 2016-2017 I have earned an additional £45000.
Because I hadn't planned on earning so much this year I've only been paying 20% income tax on my earnings, leaving me with quite a deficit with HMRC, ie I owe the additional 20% on all earnings over £43000.
I have recently joined a workplace pension (People's Pension), and by the end of the tax year will have made approx.£4000 of contributions. This will mitigate some of the money that I will owe HMRC, but will leave a few thousand outstanding.
I'm not in a position to increase my pension contribution before April, but next year, 2017-2018, I will be able to pay in enough to mitigate all my earnings which otherwise would attract 40% income tax.
My question is, if I were to go further, and pay even more in pension contributions next year, can that be offset against my arrears for this year?

OldBeanz

You cannot claim tax relief next year on this year's salary. You could borrow £19k and invest the money in a pension. Do the same for another 3 years then take the 25% and job's a goodun.

JOHN232

I take it that my occupational pension does count as 'earnings' for this purpose?

Daniel54

JOHN232 wrote: »

I take it that my occupational pension does count as 'earnings' for this purpose?

That is correct.Your pensions are not pensionable income.

JOHN232

I'm sorry I don't understand the answer.

So if I have an occupational pension of 20k and earn an additional 43k, I end up having to pay 40% income tax on 20k. In these circs am I able to mitigate that extra tax burden by claiming back on pension contributions.

mgdavid

JOHN232 wrote: »

I'm sorry I don't understand the answer.

So if I have an occupational pension of 20k and earn an additional 43k, I end up having to pay 40% income tax on 20k. In these circs am I able to mitigate that extra tax burden by claiming back on pension contributions.

yes but only within the same tax year. Hence the suggestion to borrow to pay into a pension this year to offset the tax you owe (as you imply you don't have any free cash right now).
Consider zero percent transfer credit cards (I'm using the AA currently).

xylophone

Tax relief on pension contributions made by an individual into a qualifying pension scheme is limited to the higher of 100% of their relevant UK earnings, or £3,600 per annum.

Contributions are also limited by the Annual and Lifetime allowances and in certain circumstances by the Money Purchase Annual Allowance.

Pension income does not count as "relevant uk earnings" for the purposes of tax relief on pension contributions.

http://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/

"It is worth noting however that the HMRC do not classify income from pension plans as relevant UK earnings........... "



Employment income does count as "relevant uk earnings".

Your pension income and your employment income when taken together do make you subject to higher rate tax.

It could be possible to mitigate this.

http://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/member-contributions-tax-relief-and-annual-allowance/
may be worth a look.

aj9648

A related question I think - I'm thinking of putting cash into a personal pension to mitigate tax and also make sure I still get CB - to declare this to hmrc do you fill in a yearly tax return or is it done some other way?

xylophone

https://www.unbiased.co.uk/news/2013/12/4/how-to-avoid-the-child-benefit-tax-charge

http://www.pruadviser.co.uk/content/knowledge/technical-centre/child_benefit_trap/

Contact HMRC .

jamesd

JOHN232, you can pay in up to your additional £45k of earnings this year. It's worth doing things like 0% credit card deals to get it done. Or an arranged overdraft. A 0% for spending card might save you enough in outgoing spending to let you get it done.

I've assumed that you have £5k of unused personal allowance from past years. You do have to make the contribution in this tax year for it to reduce your tax bill this year. No legal problem to pay in the £20k of pension income on gross contributions to eliminate the tax on it provided you have at least £20k of earned income.

You can't use pension contributions to cut the tax due on a previous year's income, has to be same year as the contributions. You can go back a year with EIS investment tax relief, though.

jamesd

aj9648 wrote: »

A related question I think - I'm thinking of putting cash into a personal pension to mitigate tax and also make sure I still get CB - to declare this to hmrc do you fill in a yearly tax return or is it done some other way?

No inherent need for a tax return. You can use your online Personal Tax Account to tell HMRC about your expected income and pension contributions whenever you like. They will adjust your tax code to give you the higher rate relief as part of that. Doesn't have to be perfect when estimating. Tell them the actual numbers by letter, phone or message when you know them and they will adjust your tax code to refund or collect any shortfall.