How much pension can I top up this tax year?

Maidavale

Hi Everyone

I have some savings which I would like to invest into a pension - I will be opening a new SIPP with Hargreaves Lansdown - what I could use some help with is I'm not entirely sure how much I can personally put in this tax year. I am fully employed and also contributing to my employer pension scheme.

My salary is £80,000 - of this my employer takes 5% and then adds 13%. This means 18% x £80,000 = £14,400 of pension contributions for the year.

Does that mean I can top up my pension this year with £80,000-14400 = £65,600. Given I have only used £14,400/£40000 x 4 years I will have enough room in terms of my annual allowances.

OR is the above the figure I will come to with the tax added back i.e. I can only add £65,600 x 60% = £39360 after which HMRC will top this up with the remaining 40%?

As you can see what I'm really after is how much am I transferring across to my SIPP to maximimse my contribution for the year but not to go over my salary threshold.

Any help with calculations much appreciated!

Dazed_and_confused

Any qualifying contribution you make will only ever be topped up with the 25% uplift.

You may be eligible to claim higher rate pension tax relief but that would come back you, it doesn't get added to the pension fund.

If you are contributing to a SIPP you pay 80% of the gross contribution, the 25% uplift then makes it up to the gross amount you wanted to contribute.

This gross amount increases the amount of basic rate tax you can pay which in turn would reduce any higher rate tax which might otherwise be payable.

If your taxable salary is £76,000 and you have no other taxable income then you will be paying higher rate tax on approx £30k in the current tax year so any contribution above that won't attract any higher rate tax relief. Not that that should be the only consideration when deciding what to contribute.

Maidavale

Thank You Dazed and Confused

So in my example:

I only need to subtract the 5% I contribute from my salary = £80,000 x .95 = £76,000.

To work out how much I put in I then take 80% of £76,000 = £60,800.

Am I right that Hargreaves Lansdown would then claim the 20% (£15200) on my behalf bringing it back up to £76,000 - seperately HMRC would then only send me 20% back for the proportion of my salary that is higher rate i.e. if it's £30,000 at high rate I would get £6000?

So in some ways it makes sense to cap my contribution at £30,000 given this will attract a full 40% and wait subsequent years rather than putting it all in this year and only getting a blend of 20% and 40%.

Albermarle

You are nearly correct in your calculation but have made a common mistake in how the higher rate tax relief is calculated .
For example if you paid a £30K contribution , HL would add £7500 as basic rate tax relief, not £ 6000. This is because you would need to earn £37,500 as a basic rate taxpayer to get a net pay of £30,000 .
Then when you claimed back the higher rate relief you would get a rebate also of £7500.
This is because when they calculate your tax for the year , it means £30,00 of earnings will only attract 20% tax instead of 40% and they pay you the difference

zagfles

Maidavale wrote: »

Thank You Dazed and Confused

So in my example:

I only need to subtract the 5% I contribute from my salary = £80,000 x .95 = £76,000.

To work out how much I put in I then take 80% of £76,000 = £60,800.

Yes.

Am I right that Hargreaves Lansdown would then claim the 20% (£15200) on my behalf bringing it back up to £76,000 - seperately HMRC would then only send me 20% back for the proportion of my salary that is higher rate i.e. if it's £30,000 at high rate I would get £6000?

Yes. What they actually do is increase your basic rate band by your gross contribution, which works out to the same thing.

So in some ways it makes sense to cap my contribution at £30,000 given this will attract a full 40% and wait subsequent years rather than putting it all in this year and only getting a blend of 20% and 40%.

Depends on a lot of other factors but just tax wise, you'd likely get more tax relief that way.

zagfles

Albermarle wrote: »

You are nearly correct in your calculation but have made a common mistake in how the higher rate tax relief is calculated .
For example if you paid a £30K contribution , HL would add £7500 as basic rate tax relief, not £ 6000. This is because you would need to earn £37,500 as a basic rate taxpayer to get a net pay of £30,000 .
Then when you claimed back the higher rate relief you would get a rebate also of £7500.
This is because when they calculate your tax for the year , it means £30,00 of earnings will only attract 20% tax instead of 40% and they pay you the difference

Which is how the OP calculated it in post #3 !! 20% of the gross cont. Which is 25% of the net cont.

Albermarle

i.e. if it's £30,000 at high rate I would get £6000?

As the OP said this , I assumed they were not fully understanding the tax issues as at £30K you would expect higher rate relief of £7.5K ,

zagfles

Albermarle wrote: »

As the OP said this , I assumed they were not fully understanding the tax issues as at £30K you would expect higher rate relief of £7.5K ,

Read the bit before that! The OP was talking about making a £76k gross SIPP contribution, he/she correctly identified the net and the tax relief, and correctly identified that...

...seperately HMRC would then only send me 20% back for the proportion of my salary that is higher rate i.e. if it's £30,000 at high rate I would get £6000?

which is completely correct. If the OP's salary is £30k into higher rate, they'd only get £6k max back in higher rate relief. Not £7.5k. It's you that's misunderstood the issue, not the OP.

Dazed_and_confused

I agree with zagfles.

There is no entitlement to an "extra 20%" pension tax relief. If you only pay higher rate tax on £1 you can only get higher rate relief of 20p.

The op was going to paying about £30k at higher rate so the relief due would, as a massive generalisation, be £6k (£30k taxed at 20% rather than 40%).

The reality is that the gross pension contribution simply increases the amount of basic rate tax band so until the complete picture is known for the year covering all sources of taxable income it is a guesstimate.