Paying sums over the annual allowance into your pension - how does it work?

OneInTheHat

the news story about the Stan Chart boss getting £474,000 paid into his pension by his employers this year has got me thinking. Don't you have to pay tax on anything over your annual allowance (taking into account any excess you might have from prior years)? Does that mean the Stan Chart boss will pay tax at the highest rate on anything over that amount or am I missing something?

reason I'm asking is I will max out my pension contributions for this year but would like to pay in more. What I'm trying to work out is whether it is better to pay the extra in and pay the tax on it or put the money in a different investment that will be taxable on selling/exercising it (ISAs also maxed out).

hugheskevi

Don't you have to pay tax on anything over your annual allowance (taking into account any excess you might have from prior years)?

If contributing to a UK registered pension scheme, yes.

Does that mean the Stan Chart boss will pay tax at the highest rate on anything over that amount or am I missing something?

This is Money notes:

Most chief executives get a cash lump sum every year towards their pension, calculated at a specific percentage of their salary. Unlike regular staff members –whose funds are locked away until they retire – they can invest this cash in the market or spend it as they would with normal pay.

which suggests the money will not be going into a UK registered pension scheme (note, I have no knowledge of whether this individual's pension contribution will or will not go into a pension).

What I'm trying to work out is whether it is better to pay the extra in and pay the tax on it or put the money in a different investment that will be taxable on selling/exercising it (ISAs also maxed out).

The interaction with the withdrawal of the Personal Allowance means that if pension contributions restore Personal Allowance (ie for those on the taper and paying an effective marginal rate of income tax of 60%) then it can be beneficial to pay higher contributions even if breaching the Annual Allowance and increasing an Annual Allowance charge.

But in general, once the Annual Allowance is reached it is not advantageous to contribute more unless benefiting from an employer contribution.

OneInTheHat

But in general, once the Annual Allowance is reached it is not advantageous to contribute more unless benefiting from an employer contribution.

Thanks, that all makes perfect sense. I assume even if an employer contribution tipped it over the annual allowance, you'd still pay the tax on it anyway.

hugheskevi

I assume even if an employer contribution tipped it over the annual allowance, you'd still pay the tax on it anyway.

Yes.

If there was no other way to get the value of the employer contribution (eg as salary) then it may well be worth paying the Annual Allowance charge to get the benefit, but it depends on whether the member has to pay more to get the benefit of the employer contribution and whether the Lifetime Allowance will be an issue.

Reluctantpensioner

Don't forget the "carry forward" three years rule.
If any of previous years contributions were less than £40K then this year can soak them all up.
https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/carry-forward

This doesn't explain £474K though.

This came in very handy when I was made redundant to keep the taxman away from all my redundancy pot.

jamesd

OneInTheHat wrote: »

reason I'm asking is I will max out my pension contributions for this year but would like to pay in more. What I'm trying to work out is whether it is better to pay the extra in and pay the tax on it or put the money in a different investment that will be taxable on selling/exercising it (ISAs also maxed out).

Salary sacrifice could make it worth doing because of the saved NI that can often be arranged to be mostly at 12% instead of 2%. NI is calculated for each pay period so if you concentrate the sacrifice in as few months as possible at minimum wage most ends up saving 12%. An employer sharing some or all of their employer NI saving also helps. The trouble is that at least 75% of the money is taxable when it's taken out of the pension and this is likely to eliminate the gain.

But learning about and using venture capital trusts is likely to be more beneficial.