*Edit* - Pension Contributions - How much can i contribute??

Sea_Shell

Morning all,

*** initial question answered - supplementary questions in posts #12 & #14 below - Many thanks ***

As i understand it, in simple terms, you are able to make contributions up to your gross annual salary, in the tax year, to get tax relief.

You are also able to make backdated contributions for the last 3 tax years, if you have any "room on the broom".

So if i've earned say £12,000 gross for the last 4 tax years, including current one, but i've only made gross contributions of say £8000, I have £4000 p.a. (gross) of spare allowance to make into my pensions. So in total I could pay in £16,000 (£12800 net), before April 19.

My questions are, firstly, if i were to make a one off payment into my pension of say £5000, how does this get allocated in respect of tax years? Does it automatically get allocated against the oldest tax year with "room" by HMRC and so on, or do you have to tell them which tax year you are making a payment for?

Secondly, if i were to stop work and be restricted to the minimum contributions allowed, do i still get the option of using un-used backdated contributions? Within the given timeframe.

Finally, do my employers contributions (5%) count towards my allowance or are they in addition.

Many thanks for your help.

In the meantime, i'm going to dig out my P60's and Pension statements and see what the exact figures are.

p00hsticks

I'm sure an expert will be along at some point, but I think I've read in the past on this board that you can only backdate contributions if you've used the £40k maximum allowance for the current year - so not possible to backdate if you earn less than that.

Sea_Shell

p00hsticks wrote: »

I'm sure an expert will be along at some point, but I think I've read in the past on this board that you can only backdate contributions if you've used the £40k maximum allowance for the current year - so not possible to backdate if you earn less than that.

Oh that would be disappointing. Why should low earners be punished?

AlanP_2

Limits are annual relevant earnings in your case. The 40k and carry forward only become applicable on earnings over 40k, and you are still limited by annual earnings.

Sea_Shell

So, basically, if someone's been earning over £40k and have maxed out this tax year £40k, but had only put say £1k p.a. in previous tax years, they are now able to dump a further £93k into their pension, and have it grossed up to £117,000 (£39k for the last 3 tax years), and get £24k of "free money".

But i'm not allowed to do it, as I earn substantially less than £40k, and so can't put my little £12,800 in.

Where's the rationale behind that??!!! Seems a bit one-sided in favour of the high-earner to me!!?

dmelife

You can pay in whatever you like but you can only get tax relief on your earnings. You are not penalised, higher earners have paid more tax and therefore can pay more into a pension to receive tax relief.

Aegis

Sea_Shell wrote: »

So, basically, if someone's been earning over £40k and have maxed out this tax year £40k, but had only put say £1k p.a. in previous tax years, they are now able to dump a further £93k into their pension, and have it grossed up to £117,000 (£39k for the last 3 tax years), and get £24k of "free money".

But i'm not allowed to do it, as I earn substantially less than £40k, and so can't put my little £12,800 in.

Where's the rationale behind that??!!! Seems a bit one-sided in favour of the high-earner to me!!?

The rationale is that, in line with almost all income tax modifiers, the contributions only affect current year earnings. As such, if you contribute £800 into a pension, the £200 tax relief at source is in respect of income tax that has been paid on that £800 either via self assessment or PAYE. Given this, you can see why you won't get tax relief on payments in excess of earnings - there's no tax paid on that amount, so there's no income tax to give back.


There is an exception to this, which is income within the personal allowance, which is still eligible for tax relief for pension contributions. This allows low-earners to benefit from pension contributions disproportionately more than higher earners if they choose to save a lot of their earnings into pensions - though given how much lower earners rely on their earnings, this is often not fully utilised.


It's not a perfect system at the moment, but hopefully that helps contextualise the tax reliefs?

Sea_Shell

Thanks everyone. Bit disappointed, but hey ho, thems the rules. Will ensure I max out my contributions this tax year.

On one point...do my employers contributions count towards the full annual payable, or is it only my personal contributions that count??

ffacoffipawb

Sea_Shell wrote: »

So, basically, if someone's been earning over £40k and have maxed out this tax year £40k, but had only put say £1k p.a. in previous tax years, they are now able to dump a further £93k into their pension, and have it grossed up to £117,000 (£39k for the last 3 tax years), and get £24k of "free money".

But i'm not allowed to do it, as I earn substantially less than £40k, and so can't put my little £12,800 in.

Where's the rationale behind that??!!! Seems a bit one-sided in favour of the high-earner to me!!?

If they earn £50k then they can only pay in £50k gross made up of £40k from this year's allowance and up to £10k from orevious tax years if they havent paid the maximum in those years.

Aegis

Sea_Shell wrote: »

Thanks everyone. Bit disappointed, but hey ho, thems the rules. Will ensure I max out my contributions this tax year.

On one point...do my employers contributions count towards the full annual payable, or is it only my personal contributions that count??

Employer contributions count towards the £40k limit but not the earnings limit. In other word, if you receive £25,000 a year of taxable pay and have £5,000 employer contributions on top, the £5,000 counts as a contribution and is tested against your £40,000 annual limit, but your ability to make a further £25,000 gross personal contribution isn't limited. You have to keep track of both limits.

Paul_Herring

Sea_Shell wrote: »

Where's the rationale behind that??!!! Seems a bit one-sided in favour of the high-earner to me!!?

Why should you be allowed to claim tax-paid back on pay that hasn't even been been taxed (the personal allowance,) but a higher earner couldn't get tax-paid back on pay that has been taxed (at 40%/50%?)

Appears to be a bit one-sided in favour of those not paying as much tax...