Tax relief on pension contributions - higher rate carry forward allowance

Mustang_G

Hi

I'm selling a buy to let property and will be left with 100k (already calculated zero capital gains tax as it was my private residence for quite some time) and I'm looking to put it into a pension.
I'm just trying to understand tax relief when investing in a SIPP.
This is what I can understand;
The government automatically adds 20% basic tax relief.
As a higher rate taxpayer I can claim a further 20% back in my tax return.

I'm a little confused about how much I can contribute in one year. There's a £40k annual allowance but I see there's an opportunity to carry forward unused annual allowance from previous years (I've only paid £2k into a pension for the last 3 years)


How do I pay £100k in and maximise the tax relief on basic and higher rate?
If I pay in £100k will the government top this up to £125k - seems to good to be true.
What could I expect back from higher rate tax relief?

Any suggestions would be most helpful.

Thanks

bigadaj

How much will you earn this year, so salary, not rental income, interest, dividends etc, that's the limit of the gross amount you can contribute to a pension.

Mustang_G

Earn £64k this year

bigadaj

Mustang_G wrote: »

Earn £64k this year

Right so that's your limit, assume that's a net figure pre tax and includes for any other pension provision you may have.

So from the £64k salary you actually contribute 80% as, as you say, the provider will automatically add 20%. So you you'd actually put in £51,200 and this will be grossed up to £64k.

Then if you do a tax return just complete this and the additional relief will be returned to you, if you don't then you can write or ring Hmrc and they'll process it separately. 40% tax relief is obviously only available on that portion which you've paid 40% tax on, so you get another £3800 back separately.

Money_Help

I've only paid £2k into a pension for the last 3 years

You need to have been registered with a pension scheme for the years you want to utilise carry forward. So you must of been set up with a pension for each of the 3 years you want to use. You don't need to have necessarily contributed in that particular year though.

Mustang_G

That's great news - I have been registered with a pension scheme for the last 3 years so fit that criteria.


To throw a spanner in the works. My employer is in takeover talks and there's a possibility that I'll be made redundant in the next few months. Who knows what I'll earn in 2018/19 tax year so I may not be a higher rate earner.
Do I need to put the £64k (£51,200 and then the govt 20%) in the pension in the 17/18 tax year to get the tax relief?

AlanP_2

Yes, whilst you are definitely a HR taxpayer get the contribution made as if you drop to BR next year you will only get the BR relief - you only get tax relief against that year's relevant earnings / tax band.

If you think you may get made redundant before the end of the Tax Year 2017/18 you may not earn £64k, so may not be able to pay in the full amount that was calculated for you in an earlier post.

Might be best to pay in an amount based on earnings to date for this tax year when you get the £100k, and then top it up each month as you go along so that pension contribution remains aligned with earnings.

If your redundancy was to result in a payout of over £30k then that would be additional relevant earnings that could be utilised against pension contributions as well.

Rather than wait for a tax return to claim the HR relief if you contact HMRC they will adjust your tax code to make it work out correctly.

Mustang_G

Thanks Alan P - the £64k is a prediction if employed until the end of the year. As you say I need to adjust based on what I will be earning and so making part payments sounds like a solution.

Mustang_G

Excuse my ignorance but just wondering how you arrived at the figure of £3,800 for higher rate tax relief if it's also 20% like the basic tax relief.

bigadaj

Mustang_G wrote: »

Excuse my ignorance but just wondering how you arrived at the figure of £3,800 for higher rate tax relief if it's also 20% like the basic tax relief.

It's your salary, or allowable earnings, minus the higher rate threshold, currently £45k.

Dazed_and_confused

£3,800 is 20% of £19,000.

By making such a large pension contribution you could in theory pay 20% tax instead of 40% tax on an additional £19,000. Hence the £19,000 X 20%.

But you have more chance of winning the lottery than of getting exactly £3,800 back from HMRC.

Paying into a SIPP doesn't entitle you to a set amount of 40% tax relief, it all depends on your total income, allowances, tax already paid etc. All the pension contribution does is increase the amount of 20% tax you can pay. Which can, for some, reduce the amount of higher rate tax payable.

You might earn less than expected so if no higher rate tax is due anyway then there is no higher rate tax relief to come back to you.

Or you could live in Scotland and have a different basic rate limit to start with.

Lots of variable which make the £3,800 unrealistic.