Pension tax relief question

Paul_Herring

Ron_Weasley said:

Paul_Herring said:

This is where I am confused.  How are you meant to take advantage of the 3 yr cfwd allowance where “in theory” if you had never contributed before you should be able to pay in 3yrs of 40k allowance ? 

You can only take advantage of the carry-forward, if you're earning enough in that tax year to match whoever's carried forward (or your employer is contributing sums taking the overall contribution over £40K.)

This is why, for example - and simplistically, anyone earning under £40K cannot use carry-forward.

Sorry to resurrect an old thread, but I missed this.  I was planning on carrying forward a £40k allowance from a year where my income was zero.  Are you saying that is not allowed?

That's allowed, provided you're earning more than £40K (up to what you're planning to contribute) that second year.
If you're not earning even £40K that second year, you can't use it.


I'll try and rephrase:
What you're earning doesn't affect the ability to carry forward, only whether or not you can actually use it.

bowlhead99

Mick70 said:

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. 

I think you already have this sorted now and the thread has gone back to Ron_Weasley's question, but for some reason I had typed up an answer and then saved it off on my desktop when my browser crashed a few days ago

 If you did it the way you are suggesting:
- You pay £16020 from your bank to the DC pension.

- Pension scheme tops up the 16020 with 4005 so 20025 is in the pot.
- Then you tell HMRC you put 20025 in the DC pot and they know it will have cost you 80% of that but should have only cost you 60% of that because you had at least 20025 of your earnings subject to high rate tax, so you get a further 4005 back in cash.

- So now there is 4005 in your bank account and you put that into the pension, which the pension company will gross up with a further 1001 of basic rate tax relief so in total there was 5006 going into the pension pot

- Then you tell HMRC you put 5006 into the DC pot and they know it will have cost you 80% of that but should have only cost you 60% of that because you had at least 5006 of your earnings subject to high rate tax, so you get a further 1001 back in cash.

- So now there is 1001 in your bank account and you put that into the pension, which the pension company will gross up by 250......

and so on and so on

So ultimately, by putting in all your net cash and all your tax refunds you will get the full £26700 in your DC pot, because you'll have got £20025 in the first year and £5006 in the second year and 1001 in the third year and 250 in the fourth year and £63 in the fifth and so on. But there is some timing differences while you sit around and wait for annual refunds.

However, given you know you ultimately want to get £26700 into your DC pension pot, it would be much quicker and simpler to contribute 80% of that (£21360) in cash in the first year which the provider will then gross up for basic rate tax relief to £26700.  In due course, you can tell the taxman that you contributed £26700 including basic rate tax relief to the DC scheme and they will send you £5340 of extra tax relief so that the net cost was only £16020.   There is a timing difference because after tax you only physically received £16020 in your bank account from the DB scheme and so when you pay £21360 into the DC scheme you would create a large bank overdraft of over five grand. It might be for less than a month because you can put the £21360 in on the last week of a tax year and then immediately do your tax return and get the refund cheque in your bank account by the end of April.

As you have a decent income (because you were already high rate taxpayer before even receiving the DB money) you may not need to worry about creating an overdraft because you probably already have some savings you can use, so in practice when you receive the £16020 net of income tax you can add £5.3k of 'your own money' to top it up to £21360. That way, with basic tax relief on top (25% of the £21360 or 20% of the full £26700), you will have the full £26700 invested from year one.

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 ?

The annual £40k (gross amount including tax relief top-up and any other employer contributions) is the standard annual allowance, but as you suggest, you can use previous year's annual allowance too. It doesn't matter if you do it as one 'lump sum amount' or twelve monthly amounts or fifty weekly amounts or 250 daily amounts. 

The practical restriction is your earned income for the year.  So if the employer pays you £55k a year plus £5k pension contribution, you are welcome to make £60k of total gross contributions if you like, because you have a £40k annual allowance and can use up £20k unused allowance from a previous year. But you can't have £80k total gross contributions if your earned income was only £60k, because the £80k would be more than your earnings limit. Even if you have £50k unused annual allowance from a previous year and £40k annual allowance for this year (e.g. total £90k of 'annual allowance') you wouldn't be allowed to get tax relief on £80k of contributions because in my example, your earnings limit was only £60k (the £55k salary and the £5k employer contribution). The DB pension receipt of £26700 is not 'relevant income' so can't be used to increase the £60k in my example.

bowlhead99

Paul_Herring said:

Ron_Weasley said:
Sorry to resurrect an old thread, but I missed this.  I was planning on carrying forward a £40k allowance from a year where my income was zero.  Are you saying that is not allowed?

That's allowed, provided you're earning more than £40K (up to what you're planning to contribute) that second year.
If you're not earning even £40K that second year, you can't use it.

I'll try and rephrase:
What you're earning doesn't affect the ability to carry forward, only whether or not you can actually use it.

For the rephrasing:

- if you get a £40k allowance and don't use it for whatever reason (can't be bothered, can't spare the cash, didn't have enough earnings to use the full allowance) you can carry it forward (until you run out of time for using it);

- if you want to make a contribution in any year, you will need sufficient allowances (which can include current year allowance and carry forward allowances), but you will need to have enough earned income for the year in which you make the contribution.

You don't need earned income to get an allowance, you need earned income to use an allowance*.

*unless we are talking about the first £3600 of the annual allowance which you can use even without having any earned income...

Ron_Weasley

Paul_Herring said:

Ron_Weasley said:

Paul_Herring said:

This is where I am confused.  How are you meant to take advantage of the 3 yr cfwd allowance where “in theory” if you had never contributed before you should be able to pay in 3yrs of 40k allowance ? 

You can only take advantage of the carry-forward, if you're earning enough in that tax year to match whoever's carried forward (or your employer is contributing sums taking the overall contribution over £40K.)

This is why, for example - and simplistically, anyone earning under £40K cannot use carry-forward.

Sorry to resurrect an old thread, but I missed this.  I was planning on carrying forward a £40k allowance from a year where my income was zero.  Are you saying that is not allowed?

That's allowed, provided you're earning more than £40K (up to what you're planning to contribute) that second year.
If you're not earning even £40K that second year, you can't use it.


I'll try and rephrase:
What you're earning doesn't affect the ability to carry forward, only whether or not you can actually use it.

Thanks - that's what I thought. I am fortunate to have earned a lot more than £40k recently  - circa £1m - so my tax-free allowance is down to only £10k (it reduces by 50p in the pound for every £1 earned over £150k, such that at £210k earnings your allowance is £10k. The there is a £10k minimum you always get.

So I am looking to bring forward allowances from prior years, and in one of them my earnings were zero.

kuratowski

If you had earnings of zero in that year, then there is one additional rule you need to bear in mind:

You cannot carry forward unused allowances from any tax year where you were not a member of at least one UK registered pension scheme, or a qualifying overseas pension scheme.

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

This probably won't be a problem for you, if you had been a member of a pension scheme previously (i.e. you were already working, before you had a year off, and have now resumed work).  But just to highlight this rule exists.

NSnaith

Apologies for this..

After 25 years of public sector work with employer pension, I am now venturing into the self employed world. 

My old pension, equated to around  £11,000 investment per annum which was combined my own and employer contributions.

How much would I physically need to invest myself to replicate this, taking into consideration  tax relief. I will now become a higher tax earner. I am unsure on what I have to claim in self assessment (having never done it before) and what the government actually add .

Thanks in advance 

Nick

AnotherJoe

NSnaith said:

Apologies for this..

After 25 years of public sector work with employer pension, I am now venturing into the self employed world. 

My old pension, equated to around  £11,000 investment per annum which was combined my own and employer contributions.

How much would I physically need to invest myself to replicate this, taking into consideration  tax relief. I will now become a higher tax earner. I am unsure on what I have to claim in self assessment (having never done it before) and what the government actually add .

Thanks in advance 

Nick

That's the wrong question unfortunately.

The right question is, "how much would i need to put into a pension (along with employers contribution) to match the pension and benefits that that £11k a year in public sector provides".

And we dont know that. It will no doubt be related to your previous salary and years or service. £11k a year might not be enough to match that (of course modified by the fact you wont spend 25 years in private employment i assume?). YOu might need double, for example.

Do you know what pension you will be due,  at what age ?

A better starting point might be, once you know what that is, what additional pension do you require, from what age, to enable the two of those pensions together, plus SP, to keep you in a manner to which you'd like to be accustomed.

eg say your PS pension will be £13k a year from age 67 and SP £8k and you want £30k a year pension, then the question is, how much do i need to put aside in total to get a private pension of £9k from age X.

Or maybe you'd like to retire early, and you'll have £20k PS plus £8k SP from age 67 which you are happy with, so the question is, how much do you need to put in privately to pay you £28k a year for 7 years.  

p.s i didnt realise youd tagged on to an old post would have been better to make a new one.

dunstonh

NSnaith said:

Apologies for this..

After 25 years of public sector work with employer pension, I am now venturing into the self employed world. 

My old pension, equated to around  £11,000 investment per annum which was combined my own and employer contributions.

How much would I physically need to invest myself to replicate this, taking into consideration  tax relief. I will now become a higher tax earner. I am unsure on what I have to claim in self assessment (having never done it before) and what the government actually add .

Thanks in advance 

Nick

Most public sector pensions, if matched in the private sector using money purchase schemes would need around a quarter to a third or your income to be paid into a pension.   If you were not going to use a pension, you would need to increase that to around a third to a half of your income.