Consequences of exceeding annual allowance?

michaels

Looks like I will go 2k over the annual allowance this year even after carry forward, dc via sal sac.

Will I just have to pay my marginal income tax rate (20%) on the amount above the limit, paid through tax return?

What will my taxable income be?

cloud_dog

michaels wrote: »

Looks like I will go 2k over the annual allowance this year even after carry forward, dc via sal sac.

Will I just have to pay my marginal income tax rate (20%) on the amount above the limit, paid through tax return?

What will my taxable income be?

According to this GOV website, right at the bottom, the charge will be your prevailing tax rate.

northeastcanuck

Yes you will be charged tax on the amount in excess of your annual allowance at your marginal rate. If your total tax charge that results is greater than £2K then you can ask your pension fund to pay it if your total pension input is greater than £40k.

Although it doesn’t look like it applies to you, for anyone who has been affected by tapering, the consequences can have a severe effect on your tax bill.

ex-pat_scot

Can you carry forward unused allowance from past years? Remember the pension input periods had an unusual sequence in 2015 resulted in an additional PIP. This should mean you have capacity for carry forward.


https://www.aegon.co.uk/support/faq/pension-technical/pension-input-periods.html

michaels

Sadly I have no carry forward left and face a very high marginal tax/benefits withdrawal cliff edge so if I earn the 2k as pay I get a net -£200 so would obviously prefer a net 1600 (2000-20%) in my pension.

EdSwippet

michaels wrote: »

... so if I earn the 2k as pay I get a net -£200 so would obviously prefer a net 1600 (2000-20%) in my pension.

Worth remembering that this 'net' £1600 is again taxable on withdrawal. At 20% and after the 25% PCLS you would actually be left with £1360, so an effective tax rate here of 32%. In effect, pension contributions made above the annual allowances are double-taxed. If your employer operates salary sacrifice you might recover some of this through avoiding NI.

£1360 is clearly better than -£200, of course. But also clearly not as good as the real net £1700 you would get from a blended 15% tax rate on withdrawal of contributions made below the annual allowance.

michaels

EdSwippet wrote: »

Worth remembering that this 'net' £1600 is again taxable on withdrawal. At 20% and after the 25% PCLS you would actually be left with £1360, so an effective tax rate here of 32%. In effect, pension contributions made above the annual allowances are double-taxed. If your employer operates salary sacrifice you might recover some of this through avoiding NI.

£1360 is clearly better than -£200, of course. But also clearly not as good as the real net £1700 you would get from a blended 15% tax rate on withdrawal of contributions made below the annual allowance.

Probably slightly worse than that in that the 1600 net is actually 2k in the pension pot and -400 from my taxed income so it is 2k rather than 1600 that will be taxed at 15% on withdrawal.

Only if the liability is over 2k can you opt for it to be taken from the pension pot rather than having to pay it.