Tax to pay on MPAA excess

Yorkster

Hi, what tax rate would apply to excess payments over MPAA , I am subject to the £4000 pound limit , but in round numbers £7000 was paid in last year , I am a standard rate payer and it was 7% contribution by me and 13.5% employer , I believe I have to fill in a self assessment to pay this but have never done this before , does that calculate tax due,or do I have to work out the numbers myself ? , I contacted the firm to ask if the scheme would pay but they were not interested sadly , also if any kind person would tell me if it is worth continuing like this or does it make sense to just drop to putting in £4000 between me and the employer , not great at numbers so grate full for any information

zagfles

Generally not a good idea to exceed the annual allowance as you effectively lose tax relief and will probably end up paying tax when you draw the pension, so possibly get taxed twice. However if your employer's contribution rate depends on yours (eg matching/double matching etc) it may still be worthwhile. The SA system should work out the tax due, there's a special section for the annual allowance charge.

bowlhead99

Yes, going over the MPAA will trigger extra tax and make contributions over that level less efficient.

However, in your example the employer is willing to fund almost two thirds of the contribution, which is great. They pay £13.50 out of every £20.50 while you only needed to fund £7.00 yourself.

If you go over the MPAA by £3000 and have to pay a tax charge on the £3000, you know that the employer is funding a lot of your pension and so almost £2000 of that £3000 excess contribution money came from the employer not from yourself. So you can afford to lose nearly £2000 in taxes and still be better off than if you hadn't participated fully and the employer didn't give you anything beyond his share of the first £4000.

So unless your marginal tax rate is close to 60%+, it is significantly better to take the maximum contribution from the employer and accept that some of the total pension will cost you some tax, rather than voluntarily restrict what you and the employer put in between you. If you restrict your contribution and the employer is now only matching a lower level, you'd not get the benefit of the free money which the employer would have been happy to give you if you participated fully at the £7000 level instead of dropping to a lower level

wjr4

Why did you take a taxable income from your pension knowing you will be subject to the MPAA? I hope nobody advised you to take the taxable income if your contributions are £7k pa!

Yorkster

Many thanks for the replies ,when I started this process the allowance was 10k which I knew I would never exceed , then dropped to four and caught me out , bowlhead99 that clears up most of my issues ,brilliant info , only thing worrying me now is will the excess be charged at 40% or 20% ?

bowlhead99

Yorkster wrote: »

Many thanks for the replies ,when I started this process the allowance was 10k which I knew I would never exceed , then dropped to four and caught me out , bowlhead99 that clears up most of my issues ,brilliant info , only thing worrying me now is will the excess be charged at 40% or 20% ?

Contributing to a pension takes some of your income out of tax and may save tax at 20% or 40% (or more, depending on personal circumstances). However, you tried to put too much in the pension, beyond your annual allowance, so the the £3000 excess comes back into the scope of income tax.

Will the £3000 be taxed at 20% or 40%?

I don't know, as I don't know anything about you. If your employer gave you a £3000 bonus on the last day of the year, would you pay 20% tax or 40% tax on it? Or a bit of both because the first £x would take you up to the higher rate tax threshold and the last £y would be above the higher rate tax threshold?

Yorkster

Hi thanks again , clearer still , salary this year 35k but took 12k of pension income which I paid 20% tax on, so would I be right in thinking that tax would be due at 40% but next year no plans to take pension income at all, so just salary of circa 36k so guess that years excess would be at 20% ?