Annual Allowance query

spg1

Hi

My partner will currently be under the £40,000 annual allowance for pension contributions but I think it would make sense for her contribute up to the limit in this tax year to take advantage of the tax relief and the fact she has some spare cash.

But she won't know how much extra she could contribute until she gets her pension statement with her Pension Input Amount (PIA) several months after the tax year (it's a DB scheme).

I appreciate that if she goes over the limit, the tax relief is clawed back, but is there any other penalty/downside to breaching it? If not I'm presuming she could just roughly estimate what her PIA will be, make an additional contribution and then when the correct figure is known just repay any relief due.

thanks in advance

Johnnyboy11

Can't advise, but we're in the same boat, possibly worse because we've exhausted the last 3 years' Annual Allowances too!


We've obtained the PIAs for the past 3 years and made a guestimate for the current year. We've left about £3k headroom, but I'm minded to use the lot, leaving nothing on the table. If it's slightly over, so what?

zagfles

Yes you need to declare it on your tax return, there's a section for annual allowance, you pay tax on the excess which usually works out to losing the tax relief. Bear in mind you may have carry forwards available from previous years, also there's the separate tax relief limit on personal contributions which works to different rules.

EdSwippet

zagfles wrote: »

Yes you need to declare it on your tax return, there's a section for annual allowance, you pay tax on the excess which usually works out to losing the tax relief.

Just to shade this a little further ...

If the tax liability on breaching the £40k annual allowance exceeds £2k, a pension scheme needs to offer 'scheme pays'. Here, the tax is paid by out of your pension rather than from other funds, making it generally the more tax efficient option. Some schemes may offer 'scheme pays' for a liability below £2k, but they don't have to.

When you withdraw the excess from the pension some years down the road, the withdrawal will be taxable. 25% tax free if under the lifetime allowance, but normal marginal income tax on the remainder. This double-tax takes things somewhat beyond just undoing the earlier tax relief. The actual effect of it depends on how long to retirement, how much benefit from tax-deferred growth in the meantime, and the comparison between tax rate on contribution and tax rate on withdrawal.

spg1

Thanks for all the replies - I don't suppose anyone could hazard a guess roughly what the PIA would be for someone on £115k in the Civil Service Alpha scheme?

zagfles

spg1 wrote: »

Thanks for all the replies - I don't suppose anyone could hazard a guess roughly what the PIA would be for someone on £115k in the Civil Service Alpha scheme?

That's likely to be over the annual allowance on it's own! Looks like the accrual rate is 2.32% or about 1/43, which is incredibly generous, and with such a high salary, the increase in pension value not taking into account inflation will be £2668, multiplied by the factor of 16 used to assess increase in pension value it's £42688. Note - do NOT rely on this as it will vary with the inflation figures used - if the figure used by the scheme to revalue the pension is the same as the figure used by HMRC in the PIA calculation, they would cancel, but they are unlikely to be - with long service this could make a massive difference.

Also I think this would be subject to the annual allowance taper, which means you might have a lower annual allowance than the full £40k, I don't really understand this, but income is over £110k and income plus PIA is over £150k which I think means the taper kicks in - google "annual allowance taper".

AlanP_2

spg1 wrote: »

Thanks for all the replies - I don't suppose anyone could hazard a guess roughly what the PIA would be for someone on £115k in the Civil Service Alpha scheme?

You could see what this calculator indicates as the PIA:

https://www.pruadviser.co.uk/xpf_calculators/defined-benefit-pension-input-tool/

May not be accurate to the penny but should give you a pretty good idea.

Johnnyboy11

zagfles wrote: »

Yes you need to declare it on your tax return, there's a section for annual allowance, you pay tax on the excess which usually works out to losing the tax relief. Bear in mind you may have carry forwards available from previous years, also there's the separate tax relief limit on personal contributions which works to different rules.

Thanks, but that presupposes that you fill in a tax return, which neither of us do.

zagfles

Johnnyboy11 wrote: »

Thanks, but that presupposes that you fill in a tax return, which neither of us do.

Well you might now need to register. You have to tell them somehow, but they might accept a declaration in another way,maybe letter or via the online tax account? Contact them and see what they say. If you need to declare exceeding the AA.