Non-tax payer paying more than 2880 into pension?

michaels

What happens if a non-taxpayer pays more than 2880 into their pension?

Does the govt gross it up in the pension and then the non-taxpayer owe tax of the grossing up above 720 to be paid on their tax return?

EG Pay in 2880 + 2000
Pension company gets 720 + 500 from govt.
Non-taxpayer declares this extra 500 on tax return and govt assesses 500 tax is owing that year?

Thrugelmir

One assumes no tax relief will be granted on the excess contribution made.

michaels

Thrugelmir wrote: »

One assumes no tax relief will be granted on the excess contribution made.

But will the sipp provider have any clue that they are 'excess contributions' that do not qualify for tax releif? Surely they will just claim the tax relief back as usual then the non-taxpayer on their tax return will declare the extra pension contributions and have the tax relief claimed by the sipp provider reclaimed by the revenue?

stoozie1

Presumably you mean 'non tax payer earning below £3600 annually'?

dunstonh

Pension contributions are recorded under your NI number. HMRC's automated system marries it up with your income eventually. However, it typically comes a few years later. And they can add penalty interest to the tax owed.

I have assumed you meant £3600 rather than £2880. Pension contributions are treated as gross. Not net.

michaels

I am not looking at claiming relief above the 720pa allowed form a non-earner I am just looking at whether additional sums could be paid into a pension above the 3600 limit for tax relief.

Thus it would be like someone exceeding the annual allowance and declaring it on their tax return and paying back any relief given. There would be no tax advantages to saving n this manner it would just get funds into a pension wrapper rather than the alternative isa wrapper. Tax on drawdown is not likely to be an issue so there would be no loss from doing so (beyond the loss of flexibility of the pension wrapper compared to the isa wrapper).

michaels

stoozie1 wrote: »

Presumably you mean 'non tax payer earning below £3600 annually'?

Yes, someone without earned income.

redux

stoozie1 wrote: »

Presumably you mean 'non tax payer earning below £3600 annually'?

Well, not only them. Someone could earn up to £11500 without paying tax

I assume, unless corrected, that this person could pay in £9200 net and see it grossed up by an extra £2300.

I also assume that someone earning £40,000 could pay £5700 tax and £32000 pension contribution,, and see tax relief in the pension of £8000, thus also gaining tax relief on the tax allowance which hadn't had tax liability.

michaels

redux wrote: »

Well, not only them. Someone could earn up to £11500 without paying tax

I assume, unless corrected, that this person could pay in £9200 net and see it grossed up by an extra £2300.

I also assume that someone earning £40,000 could pay £5700 tax and £32000 pension contribution,, and see tax relief in the pension of £8000, thus also gaining tax relief on the tax allowance which hadn't had tax liability.

All correct although because you get pension contributions grossed up even if you have not paid the tax it is not strictly tax relief.

However my question is not about trying to gain extra relief merely about trying to overfund a pension. Anyone know?

zagfles

AIUI you tell the SIPP provider you're not entitled to the tax relief, and they don't reclaim the tax.

redux

michaels wrote: »

All correct although because you get pension contributions grossed up even if you have not paid the tax it is not strictly tax relief.

However my question is not about trying to gain extra relief merely about trying to overfund a pension. Anyone know?

I found this

https://www.moneyadviceservice.org.uk/en/articles/tax-relief-on-pension-contributions

You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you get on your pension contributions.
...
If you're a UK taxpayer, in the tax year 2017-18 the standard rule is that you'll get tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower.

For example, if you earn £20,000 but put £25,000 into your pension pot (perhaps by topping up earnings with some savings), you'll only get tax relief on £20,000.

But it would be nice to find something similar on a gov website too, so

https://www.gov.uk/tax-on-your-private-pension

Limits to your tax-free contributions

You usually pay tax if savings in your pension pots go above:

100% of your earnings in a year - this is the limit on tax relief you get
£40,000 a year - check your 'annual allowance';
£1 million in your lifetime - this is the lifetime allowance

and on page 2

It's up to you to make sure you're not getting tax relief on pension contributions worth more than 100% of your annual earnings. HM Revenue and Customs (HMRC) can ask you to pay back anything over this limit.

. I wish MSE would fix this odd apostrophe glitch. Hmm, editing may have helped.

But anyway, it sounds like your answer would be for instance earn £9000, pay £8,000 net pension contribution, scheme claims £2000 to make £10,000 gross, contact HMRC and say oops, tax bill £200. Or no earnings, net contribution £4000, scheme claims £1000 so £5000 gross, contact HMRC, tax bill £280. Whether it is as smooth as that, I have no idea.

But is it actually worth doing this? I would assume that without the tax relief the pension fund is about akin to an ISA for performance, why not an ISA instead? Or is this as well?