None tax payer??

xylophone

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/member-contributions-tax-relief-and-annual-allowance/

Tax relief is based on tax years.

Annual allowance is based on pension input periods (PIPs). Since 8 July 2015 PIPs have been aligned with tax years.

Tax relief is limited to contributions up to the higher of £3,600 per tax year or 100% of earnings.

Annual allowance is £40,000 unless the money purchase annual allowance or tapered annual allowance apply.

Aretnap

londoninvestor wrote: »

I'm not an expert on reading this legislation, so please correct me if I'm misinterpreting, particularly the meaning of "earnings chargeable to income tax". I think this means the whole earnings, not just the part in excess of the personal allowance, but if I'm wrong in that, then my overall conclusion is wrong.

I'm no expert either but I think you're correct — all earnings (or at least, all salary etc - some forms of income, like gifts, lottery wins etc,, are not subject to income tax at all) are chargeable to income tax; the amount of tax actually charged depends on your total chargeable income from all sources, and in some cases it ends up being zero.

If the alternative interpretation was correct then that would mean that as a taxpayer the maximum you could contribute would not be your total relevant income, but your total relevant income less your personal allowance. Which would mean that the HMRC website is wrong either way.

Aretnap

londoninvestor wrote: »

I suppose it's not incorrect in a literal sense - but if I say "the first £2,880", the way language is used in practice means I'm giving a strong unspoken implication that I mean "the first £2,880, and not the rest".

(The so-called "maximum of quantity". Going a bit off topic now though...)

Oh I agree,; at best it's misleading and terribly worded, and it's only the fact that the natural reading contradicts the rest of the page (and that I happened to know the correct answer) that made me go for the more literal reading... but actually I think that the person who wrote it was probably a little confused himself.

OldBeanz

The reason it is so worded is because some pensions do not add in the tax allowance automatically but reduce your salary. So for example my wife pays into the LGPS - she can pay into an AVC but it is only worth doing this to reduce her income down so that she does not pay tax. If she was to lower her salary below the annual basic tax allowance figure she would not get any tax relief on icontributions where no tax is paid. However she can pay 80% (less her Lgps contributions) of the remainder of her salary into her SIPP and is credited with tax relief by the provider even though she pays little tax.
It is one of the issues that Baroness Altmann raises when talking about unfair pension contributions for lower paid - mainly women - working part time in low paid work. Net Pay Pensions mean that someone earning less than £11k may pay into a works pension and gets no tax relief.

londoninvestor

OldBeanz wrote: »

The reason it is so worded is because some pensions do not add in the tax allowance automatically but reduce your salary. So for example my wife pays into the LGPS - she can pay into an AVC but it is only worth doing this to reduce her income down so that she does not pay tax. If she was to lower her salary below the annual basic tax allowance figure she would not get any tax relief on icontributions where no tax is paid. However she can pay 80% (less her Lgps contributions) of the remainder of her salary into her SIPP and is credited with tax relief by the provider even though she pays little tax.
It is one of the issues that Baroness Altmann raises when talking about unfair pension contributions for lower paid - mainly women - working part time in low paid work. Net Pay Pensions mean that someone earning less than £11k may pay into a works pension and gets no tax relief.

That's a good point to explain why they stress the "relief at source" point. They should keep that really, but make an edit something like this:

what_HMRC_should_say wrote:

If you do not pay Income Tax

You still automatically get tax relief at 20% on the first £2,880 you pay into a pension each tax year (6 April to 5 April) - or an amount up to your taxable earnings, if they are higher than £2,880 - if both of the following apply to you:

- you do not pay Income Tax, for example because you’re on a low income
- your pension provider claims tax relief for you at a rate of 20% (relief at source)

(EDIT: Also, I think the reference to "relief at 20%" would be confusing for the average person, as the relief is 20% of the value after adding the relief, i.e. 25% of the contribution. Particularly, if I had no earnings at all, "20% relief on £2,880" sounds very much like £576 and not like £720. But I don't feel up to wordsmithing a better version for HMRC right now )

Berkshire_Beancounter

Aretnap wrote: »

I would add that if your reading were correct, the policy would make no sense. It would mean that someone who earned the personal allowance of £11800 (IE a non-taxpayer) would be restricted to paying in £2880 and claiming £720 of tax relief; however someone earning £11801 could pay in the whole lot (gross) and claim £2300.20 in tax relief... despite having paid only 20p in tax. This would be rather absurd. If the intention were to restrict the amount of untamed income being paid into pensions it would make more sense to cap contributions at the amount of relevant taxed income, or to cap tax relief at the amount of tax you had actually paid.

Yes, as I was typing responses I thought it was odd that someone earning say £10k this tax year, with no other income, would not pay income tax and based on my initial (quick) interpretation of the information, would only be able to pay in £3600 gross into a pension; but someone earning £13k and paying a small amount of income tax would be able to put the full £13k into a pension and obtain tax relief on it which far exceeded their tax paid.

Interestingly I subsequently found a pension calculator on the Hargreaves Lansdown website (although with heavy disclaimers that it doesn't constitute personal advice, natch) that does suggest if you earned, say, £9000 you could make a contribution of £7200 which would be grossed up to £9,000 even though you weren't paying tax.

But the HL calculator asks you to input your 'annual taxable income' and then tells you how much pension you could contribute - but if your taxable income comes from a pension or bank interest or dividends as far as I'm aware it doesn't count as earnings. Oh, what minefields the original query has revealed!

xylophone

HL page also says


This calculator shows you how much tax relief you can receive now. It does not show if you're eligible to make a contribution. You can only contribute tax-efficiently up to as much as you earn. The annual allowance (including the money purchase annual allowance or tapered annual allowance, if applicable) could also affect you. Check how much you can contribute.

You must pay sufficient tax at the intermediate (Scottish tax payers only), higher or top rate to claim the full tax relief. Scottish taxpayers can claim up to 46% tax relief. Tax rules can change over time and the benefits will depend on your individual circumstances.

And also

Make the most of your allowance
Generally, the maximum amount that can be contributed in total from all sources (for example you and your employer) each tax year is £40,000. Remember, to receive tax relief, your personal contributions can’t be any higher than your earnings.

Dividends and pensions are not earnings.

See also

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#IDAN30KF

Earnings (even low earnings) are "chargeable to tax" - it's just that the Personal Allowance means that up to a certain amount, HMRC don't take it.

MumOf2

I came across this thread when searching for pension contribution tax relief for nil band earners. It is so confusing reading the HMRC website alongside advice from various SIPP providers.

But it's a comfort to know that I'm not the only one.

I'm going to read it as the higher of £3600 or earnings for the year (which will be about £10,700 this year, so c.£8750 contribution net). I have to do a self assessment for 2018/19 as I paid 20% tax on earnings April to July 2018 and need to claim a tax refund, so if they pick up that I've contributed too much at that point at least it will be sorted out sooner rather than later.

Why can't the advice from HMRC and providers be consistent and clear?

MumOf2

Paul_Herring

Why can't the advice from HMRC and providers be consistent and clear?

They're a branch of government, and Parkinson's Law applies.

If they were efficient, they could do more work with less people, and that would never do.

MumOf2

Just found the AEGON advice on this.

They say that if you earn up to £3,600 you can receive tax relief to bring it up to that amount gross (i.e. £2,880). So from £0 to £3,600, you can put in £2,880. "Even if an individual has no earnings, they will still be able to claim tax relief on any pension contributions they make by relief at source up to the limit of £3,600."

If you earn more than that you can receive tax relief on the total of your earnings for that year.

It does not say that you have to pay 20% tax to receive relief on contributions above £2,880.

And on H&L (sorry about the formatting):

Pension contribution limits- relevant UK earnings (usually earnings from employment or self-employment):
£0 - £3,600
£3,601 and over

Maximum personal or employee contribution for tax relief:
£3600
100% of earnings

So it clearly states that you receive tax relief on 100% of earnings if you have taxable earnings of £3,601 or more.

Maybe this helps a little?

MumOf2