Annual Allowance Charge

TCA

Can someone please clarify how the annual allowance charge works.

I'm looking to make a final pension contribution for the year and would like to pay in the maximum allowable but won't know my exact income until after the tax year ends. My estimate won't be much out (and I could guess low to be sure) but what happens in practice if someone pays more into a pension than their relevant earnings?

The repercussions for a defined benefit scheme look to be more complicated, but for a defined contribution scheme like mine, is it just the case that the tax relief is still added to the pension but HMRC reclaim it back through self assessment?

zagfles

Exceeding relevant earnings is nothing to do with the annual allowance. It's a separate limit. If you exceed it, you can ask for a refund of the excess contributions after the end of the tax year. Though check your provider's T&Cs, they may not allow contributions in excess of earnings.

TCA

Thanks zagfles. I was wrongly assuming that because the annual allowance is capped at current year earnings, then the charging rules were somehow one and the same thing. Glad I asked.

My pension is a Fidelity SIPP and I can't see anything specific in this regard on their website. Just the general statement that you can pay as much into a pension as you like but tax relief is restricted etc..... I'll delve further into their T&Cs unless anyone here has the answer? 

Out of interest, those providers who don't allow contributions in excess of earnings obviously can't know this at the time of contribution, so do they invoke retrospective penalties?

Albermarle

The pension provider will automatically add basic rate tax relief to whatever you contribute . So if you have contributed more than your relevant earnings ( including the tax relief) you will have to pay back to HMRC the extra tax relief you were not due.

zagfles

TCA said:

Thanks zagfles. I was wrongly assuming that because the annual allowance is capped at current year earnings, then the charging rules were somehow one and the same thing. Glad I asked.

My pension is a Fidelity SIPP and I can't see anything specific in this regard on their website. Just the general statement that you can pay as much into a pension as you like but tax relief is restricted etc..... I'll delve further into their T&Cs unless anyone here has the answer? 

Out of interest, those providers who don't allow contributions in excess of earnings obviously can't know this at the time of contribution, so do they invoke retrospective penalties?

The annual allowance is not capped at current year's earnings. The annual allowance is not affected by income at all, except for very high earners (£110k+)

Like I said, the 100% of relevant earnings is a separate limit which has nothing to do with the AA. If you exceed the 100% of earnings limit, you can either request a refund of the excess contributions, or you can tell your provider not to claim tax relief on the excess (if they allow this). They might say in their T&Cs not to exceed the limit as it'll cause them admin headaches, but if you do it as a one-off I doubt they'd penalise you, they'd probably just refund the excess contributions. But you must tell them, otherwise they'll have claimed tax relief you weren't entitled to.

This is completely different to exceeding the AA. If you exceed the AA you have to declare it on your tax return and pay a charge. You can't get a refund of excess contributions.

This is such a common confusion caused by simplistic articles, posters and even IFAs propagating oversimplified rubbish.

TCA

I've confused the issue by bringing in the annual allowance charge, which I understand now is unconnected to earnings. The thread title is incorrect.

As for "annual allowance is not capped at current year's earnings", ok my bad wording again. More correctly, within this allowance tax relief on an individual’s gross contributions is restricted to the higher of £3,600 or 100% of relevant UK earnings.