Question re pension contributions carry forward

BoxerfanUK

Hi all,

My OH currently earns around 130K and for the past couple of years has paid the max 40K (including employer cont') via salary sacrifice. We are now trying to put away as much as we can while we still can.

However, in tax year 2015/16 she only paid in with her employer contribution a total of £5064.00, meaning (I presume) she has £34,935 of unused allowance for that year.

This C/F will be lost as from the new tax year, so I was wondering is there any benefit to her paying this amount as a lump sum into her pension from savings, bearing in mind this 'savings' money has already been earned and tax paid on it.

How would this work? Would she pay in an amount, with the tax man then contributing 40% to make it up to £34,935?

Or have I got this all wrong and there's no real benefit to it.

Thanks in anticipation.

Dazed_and_confused

Relief at source pensions only ever get a 25% uplift.

She will be able to claim additional pension tax relief via her Self Assessment return but that would reduce her personal Self Assessment liability, it is never added to the pension fund.

Triumph13

She pays £27,948 to the pension. Provider claims £6,987 from HMRC to add to pension. She contacts HMRC to get another £6,987 tax refund back in cash. Net result is 40% relief so well worth doing - as long as she isn't going to run into LTA issues.

Dazed_and_confused

And the tax relief isn't quite as simple as that. HMRC do not pay an extra 20%.

The pension contribution would be part of her overall Self Assessment calculation, as would any other taxable income she has in addition to the taxable salary.

The chances of the refund being £6,987 are slim, particularly as the pension contribution may mean she is entitled to get some of Personal Allowance back.

BoxerfanUK

Thanks for the replies so far much appreciated.

Triumph; I'm a bit confused because those figures add up to £41922 and she only has 34935 of unused allowance.

No she's nowhere near the LTA... I wish :-)

She has never filled in a Self assessment so forgive my being thick it's all so confusing.

Could someone put in simple terms (I mean very simple :-) )
as to exact amounts and what to do... sorry.

Triumph13

BoxerfanUK wrote: »

Thanks for the replies so far much appreciated.

Triumph; I'm a bit confused because those figures add up to £41922 and she only has 34935 of unused allowance.

No she's nowhere near the LTA... I wish :-)

She has never filled in a Self assessment so forgive my being thick it's all so confusing.

Could someone put in simple terms (I mean very simple :-) )
as to exact amounts and what to do... sorry.

You'd be amazed how many people struggle with this one. The key thing is that the final £6,987 HMRC refund doesn't go anywhere near the pension. The pension gets the original £27,848 and the £6,987 the scheme reclaims for a total of £34,935. The cost to your wife is 60% of this ie the original £28,848 less the refund she receives directly from HMRC (you're right D&D, I forgot the PA taper so actual refund will be higher).
If it makes you feel better, I remember one poster who really didn't get it and every time HMRC gave her her refund she paid it into the pension and round it went again...

BoxerfanUK

Triumph13 wrote: »

You'd be amazed how many people struggle with this one. The key thing is that the final £6,987 HMRC refund doesn't go anywhere near the pension. The pension gets the original £27,848 and the £6,987 the scheme reclaims for a total of £34,935. The cost to your wife is 60% of this ie the original £28,848 less the refund she receives directly from HMRC (you're right D&D, I forgot the PA taper so actual refund will be higher).
If it makes you feel better, I remember one poster who really didn't get it and every time HMRC gave her her refund she paid it into the pension and round it went again...

Truimph13, thanks so much for taking the trouble to reply again, I think I'm sort of getting it.. sort of. If you wouldn't mind, later on this evening I will post full details of her earnings, pension contributions for this tax year if you could clarify exactly the steps she needs to take this thickie would really appreciate it.

I guess when I posted the original question I was worried that as it would be from already taxed savings, if she was only to get 20% relief which may then be taxable again depending upon how much she decided to draw down per year when she retires would there be any point, but it seems there would be. I will post again later with full details for a reply if you have the time. Thank you again.

Dazed_and_confused

If you get the sums right she can pay in and get 40% tax relief (sometimes 60% if it impacts reduction of Personal Allowance).

20% is part of her pension fund and any additional relief due minimizes her personal tax liability, potentially a refund back to her (not her pension fund).

When she takes the pension as income 25% would a TFLS and the rest is taxed based on her circumstances at the time.

She might have to pay 40% but more likely 20% and if you read enough threads on here there are plenty who happen to have managed things so they pay no tax on it. Albeit these tend to be bridging pensions where the fund is emptied from say age 58-65 and then occupational and State Pensions come into payment and takeover as income sources.

BoxerfanUK

Thanks D&C, you're not anywhere near as D&C as me, quite the opposite in fact :-)

The plan is that she will draw down when she retires up to the personal allowance so not tax to pay although when the state pension eventually kicks in she'll be a 20% tax payer.

I'll post later her figures for this tax year in case any of this has an impact in some way. Thanks again.

BoxerfanUK

Hi again, some more exact figures from my DW for 2018/19 tax year (tax code 1014T due to BIK health insurance)

She has not had any further reduction to her tax coding as her Salary Sacrifice takes her 'earnings' below 100K.

Gross income £128,161.38

Salary sacrifice to pension £30,345.00

2018/19 Total paid into DC pension £40,843.30 (includes employer contributions)

This will take her £843.30 over the 40K annual allowance.
QUESTION: Would this overpayment automatically be utilised by the IR from the 2015/15 tax year? Or would my OH have to inform them?

Current unused allowance from 2015/16 tax year £34,935.71
Minus £843.30 overpaid from this tax year still leaves a total of £34,092.71 of unused allowance from 2015/16

Based on the above figure, can I please ask again what does she need to pay into her pension from savings before the 4th April 2019 to get the maximum benefit?

If I've read the earlier replies correctly....
20% tax relief would then be added to her pension
20% would come back to her in the 2019/20 tax year via increase to her tax code.
She would have to submit a Tax self assessment form for this to happen.

Thanks again.

Dazed_and_confused

20% would come back to her in the 2019/20 tax year via increase to her tax code.

Definitely not. HMRC never allow pension tax relief for one tax year (2018:19) via the tax code of another tax year (2019:20).

They may adjust the 2019:20 tax code on the assumption similar pension contributions will be made in 2019:20 but that is not allowing tax relief for 2018:19.