Max pension contribution

Liffy99

I am being made redundant (a good thing for me) and will receive a £100k plus lump sum. To make best use of tax relief I aim to put some of this in a SIPP. I understand that the non tax free part of the redundancy lump sum is 'reckonable income' for tax purposes so I assume the £40k annual pension allowance would apply in this case.
Now, I will already have paid about £2k into my work pension through a couple of month's salary. So I assume I'll have £38k to go. But is that £38k figure inclusive of tax relief (and I would assumedly be a 40% taxpayer this year, as I am currently). Does that mean my actual contribution would be limited to about £24k (+£6k tax relief at 20% and a further £6k if reclaimed from HMRC later on).
Thanks

Dazed_and_confused

You've got confused with your maths.

£24k contribution plus basic rate relief added at source = £30k in your pension

You do not add another £6k for any higher rate relief, this would be paid to you (or reduces tax payable during the year) so the pension contribution is still only £30k it's just that it might ultimately have only cost you £18k (assuming you get full higher rate relief)

Liffy99

So I could contribute as follows for instance;
£2k from salaried pension (already done)
£30k from redundancy payment (grossed up to £37,500 at 20% tax relief)
Total contributions this year would then total £39.5k

And later in the year, or next, reclaim an additional £7,500 from HMRC.

As my total income this year (salary + taxable redundancy element + pension) ) would be well above the 40% tax threshold would it matter if I reclaimed the additional 20% relief in 2017/18 (as a 40% tax payer) or in 2018/19 when my income would be way below the 40% band - I assume I would just reclaim for the previous year.

kidmugsy

Why are you assuming a £40k limit? Couldn't you carry forward annual allowance from the preceding three tax years and therefore avoid tax on heaps more?

hugheskevi

so I assume the £40k annual pension allowance would apply in this case.

Do you have unused Annual Allowance from the previous 3 tax years you can carry-forward to this year?

I will already have paid about £2k into my work pension through a couple of month's salary

Presumably the £2K figure includes tax relief and employer pension contributions, and this is a Defined Contribution pension scheme?

is that £38k figure inclusive of tax relief

Yes

I would assumedly be a 40% taxpayer this year, as I am currently

Depends on how much taxable income you receive in the rest of the year. You will be a higher rate taxpayer if you have taxable income over £45,000.

You appear to have £70K+ taxable income from redundancy, plus salary, plus pension, less c£40,000 pension contribution.

Does that mean my actual contribution would be limited to about £24k (+£6k tax relief at 20% and a further £6k if reclaimed from HMRC later on).

To contribute £38K you would pay £30.4K which the pension provider would gross up to £38K (basic rate relief) and the HMRC would refund you £7.6K higher rate relief (assuming all contribution is eligible for higher rate relief).

would it matter if I reclaimed the additional 20% relief in 2017/18 (as a 40% tax payer) or in 2018/19 when my income would be way below the 40% band - I assume I would just reclaim for the previous year.

When you claim and receive the income wouldn't matter. Personally I find it easiest to do via self-assessment, second-easiest is via in-year Coding Notice amendment (which is very simple) and more phaff is a claim at the end of the tax year outside self-assessment.

As my total income this year (salary + taxable redundancy element + pension) ) would be well above the 40% tax threshold

Are you in any danger of taxable income plus pension contribution exceeding £150,000?

Liffy99

I don't want it all to go into the pension, but yes, I could use some of prior years too. Just gets more complicated. As far as I know I would have to use this year's allowance, then the oldest year (3 years back), then 2 years back and finally 2016/17 (but I've already maxed that year out).

Liffy99

Won't exceed £150k.
Work pension is defined benefit (so overall contribution a factor of contributions + growth of fund). NHS.
Redundancy sum total = £114k
Tax free element = £30k
Taxed at 40% on remaining £84k (leaves just over £50k)
So overall receipt will be approx 30+ 50 = £80k

Total income for 2017/18 therefore £84k taxable redundancy + salary £12k + pension £12k = £108k

So if I did contribute £30k would I be eligible for the additional 20% relief ?

hugheskevi

I don't want it all to go into the pension, but yes, I could use some of prior years too. Just gets more complicated. As far as I know I would have to use this year's allowance, then the oldest year (3 years back), then 2 years back and finally 2016/17 (but I've already maxed that year out).

That is all correct. Using carry-forward is very simple, as you just need the pension input figures for the last 3 years and there is no need to report anything to HMRC unless you have a charge to pay (which you wouldn't).

Work pension is defined benefit (so overall contribution a factor of contributions + growth of fund). NHS.

In a Defined Benefit scheme neither member nor employer contributions affect the calculation of pension input at all. The only thing that matters is the amount of pension accrued. You should make sure you are calculating this correctly if you have any doubt.

Also, if you wanted a larger pension income rather than a personal contribution pot you can probably purchase Added Pension in the NHS scheme (still getting tax relief).

Total income for 2017/18 therefore £84k taxable redundancy + salary £12k + pension £12k = £108k

So if I did contribute £30k would I be eligible for the additional 20% relief ?

Yes, assuming the stated £2K pension input from NHS pension this year is correct.

You would actually get a bit more than 20%, as your taxable income exceeds £100,000 and so in the absence of a pension contribution your Personal Allowance would be reduced. The effect of that is that your taxable income in excess of £100,000 would be taxed at an effective rate of 60% and so by reducing your taxable income through a pension contribution you get more benefit than the usual higher rate relief.

stoozie1

I'd buy the NHS additional pension that the 2015 scheme offers. My OH (also NHS) can buy £6500 annual pension for 58k. You would be extremely hard pushed to achieve that in a SIPP.

Liffy99

Thanks to all - looks like I will use some prior years leeway and increase my contribution into a SIPP a little more.
I have looked at NHS pension options but all are closed to me I think (1995 scheme) as I will no longer be working in the NHS past May. I can't buy 'added years' for sure. I'll check again whether the 1995 scheme allows NHS 'additional pension'.

stoozie1

My read is that you can purchase your 5k, but obviously you know your own circs:

Can everyone apply to buy Additional Pension?
Yes, provided that you are a contributing member of the Scheme, in good health and not
absent from work for any reason. Based on the limits explained ealier you can make any
number of Additional Pension purchases throughout your Scheme membership. You must
make the application and complete all payments before your Normal Pension Age if you are
a member of the 2008 Section or 2015 Scheme, and before the chosen payable age if you
are in the 1995 Section.
In some circumstances your employer may wish to buy some Additional Pension for you.
They must do this by making a lump sum payment on your behalf.

(I had the leaflet open anyway, it's what I came on here to ask about!)