Annual allowance question

chris1

I know the maximum allowed is £40K or salary whichever is smaller, my question is about which figures to use.
Gross salary 27K, 4K out to new DB scheme (9 months), net salary (before tax etc.) 23K.

Employer pays about £4.5K into DB scheme. We read that the “pension input amount” is needed from the employer but have not received a figure so far. Is that correct?

Whilst waiting, for the purpose of this question, if we assume it’s 4.5K, does that mean the maximum that could be paid into a DC scheme is £27 – 4 – 4.5 = £18.5K?

Thanks for any replies.

AlanP_2

It won't be 4 + 4.5k as it is a DB scheme.

It is based on the increase in the value of the DB pot, see the defined benefit section here - https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/the-annual-allowance

zagfles

chris1 wrote: »

I know the maximum allowed is £40K or salary whichever is smaller,

That is rubbish. I know it's rubbish that appears in a lot of places, so I'm not blaming you, but it is utter drivel and you need to get it out of your head otherwise you'll be very confused.

There are 2 completely separate, unrelated limits.

1) The tax relief limit. This only applies to your contributions, not employer. There is no carry forwards allowed

2) The annual allowance. For a DC scheme your contributions plus employer contributions count, for a DB scheme it's the increase in pension value

my question is about which figures to use.
Gross salary 37K, 4K out to new DB scheme (9 months), net salary (before tax etc.) 33K.

Employer pays about £4.5K into DB scheme. I read that the “pension input amount” is needed from the employer but have not received a figure so far. Is that correct?

Whilst waiting, for the purpose of this question, if we assume it’s 4.5K, does that mean the maximum that could be paid into a DC scheme is £37 – 4 – 4.5 = £28.5K?

Thanks for any replies.

OK, so taking the 2 limits separately
1) The tax relief limit - is easy - it's your salary minus your contributions to the DB scheme, ie £37k minus £4k = £33k.

2) The annual allowance you'll have remaining is £40k minus the "pension input amount" for the DB scheme, plus any carry forwards you might have available.

The pension input amount is quite hard to calculate for a DB scheme, it's basically 16x the increase in pension value adjusted for inflation. For instance if you're in a 1/49th CARE scheme, the increase in pension value will be about 16/49 times your salary, so about a third, ie around £12k. However, particularly with long service, this is extremely sensitive to the inflation figures used, HMRC will probably use different figures to your scheme's revaluation of past years' contributions. This can make a big difference.

But assuming you were in a pension scheme in the previous 3 tax years, and you didn't make large contributions or have a very generous DB scheme, you probably have annual allowance to carry forwards.

chris1

Thank you both for your replies. I feel suitably told off, and quite rightly so.
We didn’t know any of that.

We know nothing about DB schemes so this is all new. As it will be 11 months membership by the end of this tax year, do you use 90% (number of days as a proportion of the year) as the closing ‘number of years’ figure? We're assuming the opening value will be zero.

Thanks.

AlanP_2

I'd assume opening value will be zero as you suggest so increase will be 16* the pension you have accrued this tax year.

You should be able to calculate that from salary, accrual rate and adjustment for part year element. 11 months probably close enough but the official calculation will be done on exact days.

I am in the Local Gov scheme and we get an AA figure included with our annual statements about 4-6 months after end of tax year.

Albermarle

Also if you add contributions to a DC pension from your net pay ( not from gross or via salary sacrifice ) then the tax relief added to your pension also counts towards the £40K .

zagfles

chris1 wrote: »

Thank you both for your replies. I feel suitably told off, and quite rightly so. I didn’t know any of that.

Sorry I didn't mean it to come across that way, I don't blame you. It's a myth that's been so widely published - even by people on this forum - that it's not surprising you picked it up from somewhere. It's just annoying that even usually reliable sources propagate this rubbish.

I’ve never had a DB scheme before so this is all new (existing scheme is DC). As I’m in the first year (it will be 11 months by the end of this tax year), do I use 90% (number of days as a proportion of the year) as the closing ‘number of years’ figure? I’m assuming the opening value will be zero.Thanks.

Are you using a calculator? If it's your first year of DB you should be able to estimate the pension input amount fairly accurately - it's where you have long service that it becomes harder. Is it final salary or CARE? What's the accrual rate?

But if you were in a DC scheme in the previous 3 tax years and didn't put large amounts in, you're likely to have plenty of annual allowance to carry forwards. So you'd be constrained by the other limit, the tax relief limit. In which case £33k (gross) would be the relevant limit. If you put that much in you'd likely exceed this year's annual allowance, but not a problem if you have carry forwards to use.

Obviously you couldn't carry on contributing at that rate for years as you'd run out of carry forwards.