Pension Help

[Deleted User]

I have recently opened a SIPP, and have a few basic questions about how much I can pay in each year. I have looked for answers to these questions, but can't seem to find definitive answers, so I hope you can help me please.

Question 1 - Allowance

The annual allowance I know is £40,000 a year. So, given the basic pension tax relief of 20%, does this actually mean I can only contribute £32,000 in any tax year?

Question 2 - Workplace Pension

My employer contributes 5% and I contribute 5% of my salary into my pension. Do both of those sums (the full 10%) count towards the annual allowance of £40,000.

Question 3 - Salary Sacrifice

My employer also uses a salary sacrifice scheme which I believe means I reduce my earnings by the amount equal to my pension contribution, and therefore my employer agrees to pay the total pension contributions. So, does this change the answer to Question 2?

Question 4 - Backdating Payments into My Pension

Having only just opened my SIPP, I haven't contributed the full £40,000 over the last three years. Is it the case that I can still use the unused allowance from the last three years? Is there anything special I need to do here, or do I just pay into my pension, and ensure I don't bust the £40,000?

Sorry the questions are a bit long winded. Any help you can provide would be much appreciated.

AnotherJoe

Q1 yes subject to Q3 because if you are salary sacrificing to say £35k then thats your limit, 0.8 x £35k.

Re 4 you cannot pay in more than you earn in a year even if you have unused previous years.
So if you earned £60k you could only pay an extra £20k in using previous years unused even if that as say £35k.

You also (I think ) need to have had a pension scheme in those years, eg if two years ago you did not have a pension but you did last year you can only make last missed contributions.

Paul_Herring

cmondynamite wrote: »

I have recently opened a SIPP, and have a few basic questions about how much I can pay in each year. I have looked for answers to these questions, but can't seem to find definitive answers, so I hope you can help me please.

Question 1 - Allowance

The annual allowance I know is £40,000 a year. So, given the basic pension tax relief of 20%, does this actually mean I can only contribute £32,000 in any tax year?

If from after-tax pay, in general, yes.

Question 2 - Workplace Pension

My employer contributes 5% and I contribute 5% of my salary into my pension. Do both of those sums (the full 10%) count towards the annual allowance of £40,000.

Yes. The limit of what can go into your pension scheme is, in general, £40,000 from all sources (employer, employee, rebates.)

Question 3 - Salary Sacrifice

My employer also uses a salary sacrifice scheme which I believe means I reduce my earnings by the amount equal to my pension contribution, and therefore my employer agrees to pay the total pension contributions. So, does this change the answer to Question 2?

No. The total from employer+employee+rebates cannot, in general, exceed the £40,000 limit.

All this does is change the 'source' of the contribution from you to your employer.

Question 4 - Backdating Payments into My Pension

Having only just opened my SIPP, I haven't contributed the full £40,000 over the last three years. Is it the case that I can still use the unused allowance from the last three years? Is there anything special I need to do here, or do I just pay into my pension, and ensure I don't bust the £40,000?

Note that the £40,000 is the allowance you have each tax year.

There's a separate limit related to how much you're actually paid (gross) during that tax year.

So, if you earn £30,000, you still have a £40,000 allowance to contribute, but you're actually limited to that £30,000 amount (for employee+rebate contributions only that is.) You cannot put a penny more in. The remaining £10,000 does, however, become eligible to be part of carry-forward in a future tax year...

If, however, you earn more than £40,000, you may be able to put more in, depending on how much under £40,000 you've contributed in previous tax years.

But if the unused allowance over the past tax years is greater than your gross wage this tax year, you are still limited to that gross amount.

Albermarle

If you are a higher rate taxpayer and you are in a salary sacrifice scheme , then you automatically get the basic and higher rate tax relief paid into your pension. So in fact this reduces the net amount you can pay in each year compared to where pension is contributed after tax . In this case only the 20% basic relief is paid into the pension and the HRT relief paid back as a tax rebate.
This is one small disadvantage of salary sacrifice for people in certain circumstances .

Paul_Herring

Albermarle wrote: »

If you are a higher rate taxpayer and you are in a salary sacrifice scheme , then you automatically get the basic and higher rate tax relief paid into your pension.

There isn't any relief, because it wasn't taxed to begin with.

You don't pay (say) £60 into your pension and the pension fund somehow magically finds £20 basic + £20 higher rebate from the government. The £100 is subtracted from your salary before the tax calculation, and that whole £100 is sent over, and it receives no rebate.

This is important, because it's this aspect that also results in NI also not being deducted from the amount as well. And is also the reason why anyone earning/sacrificing under the personal allowance derives no benefit from this method of contribution.

There may be some circumstances where thinking of it as "getting 40% relief" may be convenient, but it's a leaky abstraction. And getting into the nitty gritty details, as the OP has requested, isn't one of those circumstances.

david78

Sometimes tax relief may be added even when no tax was paid. People who earn less than the personal allowance will get "tax relief" when they fund a private pension, but not when they use salary sacrifice (where the payment is essentially made by the employer).