Exceeding the annual allowance

Mistermeaner

Another question for the helpful souls on mse... apols if this should be added to one of my existing threads but feels like makes sense to start a fresh

If one exceeds the annual allowance in a given tax year (say by making lump sum payments from already taxed income) I get the logic that says these excess payments are not eligible for tax relief but the .gov info suggestions these over payments are subject then to a further tax charge of the individuals marginal rate - effectively taxing that money twice

Is this correct ? Seems somewhat unfair - I would understand it being subject to a tax charge if paid in from pre tax income (such that it is taxed ‘once’ but not allowing tax relief on it and then charging tax for exceeding annual allowance seems punitive

Is it a horrible quirk of the system or have I misunderstood how it works

Thanks

michaels

I exceeded allowance last year via sal sac (so no tax paid) and on tax return was just charged tax at marginal rate on the excess amount.

EdSwippet

Mistermeaner wrote: »

If one exceeds the annual allowance in a given tax year (say by making lump sum payments from already taxed income) I get the logic that says these excess payments are not eligible for tax relief but the .gov info suggestions these over payments are subject then to a further tax charge of the individuals marginal rate - effectively taxing that money twice.

As michaels said, you only pay tax on your over-contributions once, at your marginal rate (so generally 40% or 45%, but could be 60% in the worst case, where you hit the personal allowance taper).

So no direct double-tax on the over-contribution. There is however an element of double-tax here, because when you withdraw this money from the pension in the future, it will be taxable income. Unless you've exceeded the LTA you will get 25% of it back tax free, but the rest would be taxed at your marginal rate, so perhaps a blended tax rate on this of 15% to 30%. That is where the double-tax comes in.

There is something called 'scheme pays'. If you exceed the standard £40k allowance in a year and your tax bill on this exceeds £2k, the scheme is required to pay this part of your tax bill. Where these conditions aren't met, a scheme might offer 'scheme pays', but it's not obliged to. If you can use scheme pays, you lessen the double-tax bite on your over-contributions, but you don't eliminate it entirely.

Mistermeaner

Thanks - so if my excess payments are as a result of paying in lump sum from already taxed income then basically the excess gets no tax relief - there’s no additional tax to pay (providing the pension company doesn’t add relief at source)

If the company does add relief at source (which is basic rate) do I have to pay just that back or does it get charged at my marginal rate?

I’m very close to limits on annual allowance (using carry forward) and also close to 100k pre tax earnings so trying to balance things carefully

michaels

EdSwippet wrote: »

As michaels said, you only pay tax on your over-contributions once, at your marginal rate (so generally 40% or 45%, but could be 60% in the worst case, where you hit the personal allowance taper).

So no direct double-tax on the over-contribution. There is however an element of double-tax here, because when you withdraw this money from the pension in the future, it will be taxable income. Unless you've exceeded the LTA you will get 25% of it back tax free, but the rest would be taxed at your marginal rate, so perhaps a blended tax rate on this of 15% to 30%. That is where the double-tax comes in.

There is something called 'scheme pays'. If you exceed the standard £40k allowance in a year and your tax bill on this exceeds £2k, the scheme is required to pay this part of your tax bill. Where these conditions aren't met, a scheme might offer 'scheme pays', but it's not obliged to. If you can use scheme pays, you lessen the double-tax bite on your over-contributions, but you don't eliminate it entirely.

Thanks for this, my overpayment will be larger this year so investigating scheme pays may make sense.

Mistermeaner

scheme pays just means the money comes out of your pension pot i think so you don;t avoid paying it - its just paid from your pensions pot rather than from your future income

EdSwippet

Mistermeaner wrote: »

If the company does add relief at source (which is basic rate) do I have to pay just that back or does it get charged at my marginal rate?

At your marginal rate. Any new contribution that arrives in your pension above the £40k -- or lower, if tapered -- annual allowance plus any carry forward allowance, no matter the route by which it gets there (you, employer, government) is simply added to your taxable income for the year.

michaels

Mistermeaner wrote: »

scheme pays just means the money comes out of your pension pot i think so you don;t avoid paying it - its just paid from your pensions pot rather than from your future income

But last year I paid for this extra tax out of my taxed income. Had the money instead come from my pension then I would have the money now to put in an isa that would be tax free to spend whenever I wanted to rather than in my pension where 75% will be taxed at basic rate before I can spend it.

This year I will owe 2k in tax, if I pay it from my taxed income now then when I get the 2k out of the pension I will pay 15% tax on the 2k - 300 quid whereas if my pension pays the 2k and I put the 2k saved into an isa then when I come to spend it no tax will be payable so I make that a net gain of £300.