Pension tax relief question

Ron_Weasley

I hope someone can help me understand?  I have a couple of questions:

1. Regards carrying over unused tax-free allowances from previous years, do I need to do anything?  i.e. to let the taxman know?  Or simply claim the amount back which I think is correct, on my tax return?  And,

2. For the purposes of working out your £40,000 a year limit, is that the amount that goes into your pension fund?  Or the amount you can pay in (on top of which tax is credited)?
I.e. if I pay (from my payroll) £40,000, then £50,000 goes into my pension pot (£40,000 plus £10,000 tax credit).  Is that over the annual allowance or not?

Dox

The £40K annual limit includes personal contributions, basic rate tax relief on your personal contributions and any employer contributions - so yes, if you pay £40K into a pension scheme where the pension provider claims basic rate tax on your behalf, you are over the annual allowance.

If your contribution is made from net pay (i.e. after tax has been deducted by your employer), no tax relief is claimed by the provider  because you weren't taxed on the contribution in the first place.

Nice clear explanation of the whole process at https://www.pensionbee.com/pensions-explained/pension-contributions/pension-carry-forward-rule

eskbanker

Dox said:

If your contribution is made from net pay (i.e. after tax has been deducted by your employer), no tax relief is claimed by the provider  because you weren't taxed on the contribution in the first place.

Surely this is the wrong way round?  No tax relief is claimed for contributions from gross pre-tax pay but is claimed when contributions are made from taxed money....

Ron_Weasley

eskbanker said:

Dox said:

If your contribution is made from net pay (i.e. after tax has been deducted by your employer), no tax relief is claimed by the provider  because you weren't taxed on the contribution in the first place.

Surely this is the wrong way round?  No tax relief is claimed for contributions from gross pre-tax pay but is claimed when contributions are made from taxed money....

Yes, I am sure he meant if it's taken from your gross pay.
Thanks to you both.

Ron_Weasley

And sorry, I forgot, what about carrying unused allowances over?  The pension bee article tells you the rules about carrying forward unused allowance, but not how to do it, and whether there's any process you need to follow with the HMRC.  The calculations of how much allowance you have in any given year (if you earn over between £150,000 and £210,000) are not straightforward. Is it just up to the tax payer to work it out for themselves and claim accordingly?

Paul_Herring

Ron_Weasley said:

1. Regards carrying over unused tax-free allowances from previous years, do I need to do anything?  i.e. to let the taxman know?  Or simply claim the amount back which I think is correct, on my tax return?  And,

Keep your own detailed notes, in case HMRC come asking, but you don't need to tell them anything, just use them:

https://www.gov.uk/guidance/check-if-you-have-unused-annual-allowances-on-your-pension-savings#carry-forward-your-unused-annual-allowance  

2. For the purposes of working out your £40,000 a year limit, is that the amount that goes into your pension fund?  Or the amount you can pay in (on top of which tax is credited)?
I.e. if I pay (from my payroll) £40,000, then £50,000 goes into my pension pot (£40,000 plus £10,000 tax credit).  Is that over the annual allowance or not?

The £40,000 is what ends up in your pension fund after all reliefs have been applied and put into that fund.

If you pay via salary sacrifice, tax is not taken off to begin with, so none due, so the 'amount' you put in is the full £40,000

If relief-at-source (out of post-tax pay) then it's 80% of that (£32,000) and that gets bumped up again to £40,000.

Note that if you're a 40%er relief-at-source, then you need to make a claim on HMRC to claim the other half of any 40% tax which you put into your bank account, not your pension fund. (Normally) That bit doesn't count towards the £40,000.

ratechaser

No need to declare usage of carryover - you're just supposed to declare if you do go over your allowance and therefore owe tax to HMRC. But definitely keep a spreadsheet to track allocation of prior years allowance to current years in case HMRC ask questions in future! Your pension provider ought to be giving you the total pension input amount per tax year as well.

if you're in a salsac pension, then working out your adjusted income for any tapering of pension allowance should be fairly straightforward. Will be the sum of

1) Taxable income and benefits on your P60
2) Taxable value of any additional benefits in kind
3) Any other taxable income like savings interest
4) The total pension input amount for the year (i.e. the gross amount you sacrificed through payroll plus any additional employer top ups - strictly speaking it's all considered employer contributions anyway)

At least that's how I've worked it out, seems simpler than the official guidance on adjusted income!

ratechaser

As a side note, while I would never suggest evading tax, it does make me wonder how HMRC spot people going over their allowance and not realising that they needed to declare it - because it's far from a simple calculation.

I'm still working through the last of my carryover allowance and have one more good year where I can put around 40k in before my allowance drops to 10k (or I get fired, either works for me  ). And I'm keeping meticulous records of what I'm doing along the way in case HMRC ever ask - this tax year I'll be using carryover from 2 different prior years.

But what would ever prompt them to ask...?

bowlhead99

ratechaser said:

As a side note, while I would never suggest evading tax, it does make me wonder how HMRC spot people going over their allowance and not realising that they needed to declare it - because it's far from a simple calculation.

It should be pretty trivial for HMRC - at least for people with DC pensions - because the pension companies can tell them what was contributed against a particular national insurance number, and  if they know how much income you had and how much contribution was made in the last X years, they can see if you're over the limit.

MallyGirl

DH went over the £40k slightly and the pension company sent him a notification. He is using carry over from previous years so it is not a problem.

Mick70

can I quickly check my calcs,please
£26,700 DB to pay into DC pot - it will have been taxed at 40% as already in 40% bracket , so gives me £16,020 per year going into bank.  Am I right in saying I can pay that into my pension and govt will add 25% (£4005) to make that amount £20,025 going into my DC pot.      Then the following year on my tax return I put on that paid in £20,025 into pension (including the govt top up) and claim back 20% of that to get refund of £4005.
Meaning as result I can get in £20,025+£4005 into my pot, albeit out of sync, from my original £26,700 DB pension.  Im pretty sure Im right and you cant get 100% of it in,  there was another thread which indicated that but I cant find it.
Once the amounts (including employer and govt top up) exceed 40k in one year there is no top up/tax relief to be had but in theory you could still pay in more.

Also,  how do you get previous years annual allowance in, can you pay in a lump sum amount ?

many thanks,
Mick