A few tax relief questions

sparky0138

I'm hoping you guys can answer a few questions for me please.

My mum earns approx. £10,000 and yet Fidelity are giving her 25% tax relief. This is wrong, correct? She's a non tax payer so I believe she should only be receiving 20% tax relief. What should she do?

I was also wondering if tax relief that takes 6-8 weeks to be paid by HMRC and arrives after the start of the new tax year, is counted as income for the previous tax year when the contribution was actually made or the new tax year when the relief is paid? This has more to do with my next question...

She's retiring next month even though she won't receive state pension until October 2021. She's going to use savings and doesn't plan to drawdown for many years. She's planning to use the £2,880 trick next tax year but is she allowed to contribute more than that as cash this tax year (she's only contributed £1220 plus a little bit to her workplace pension so far) and then either keep it as cash to use for fees in the future or withdraw it once tax relief is paid? Is this classed as draw down?

Dazed_and_C0nfused

sparky0138 said:

I'm hoping you guys can answer a few questions for me please.

My mum earns approx. £10,000 and yet Fidelity are giving her 25% tax relief. This is wrong, correct? She's a non tax payer so I believe she should only be receiving 20% tax relief. What should she do?

I was also wondering if tax relief that takes 6-8 weeks to be paid by HMRC and arrives after the start of the new tax year, is counted as income for the previous tax year when the contribution was actually made or the new tax year when the relief is paid? This has more to do with my next question...

She's retiring next month even though she won't receive state pension until October 2021. She's going to use savings and doesn't plan to drawdown for many years. She's planning to use the £2,880 trick next tax year but is she allowed to contribute more than that as cash this tax year (she's only contributed £1220 plus a little bit to her workplace pension so far) and then either keep it as cash to use for fees in the future or withdraw it once tax relief is paid? Is this classed as draw down?

You do know that the tax relief is based on the gross contribution?

For example you contribute £100 and the pension company (courtesy of HMRC) add £25 making a gross contribution of £125.  £25 is 20% of £125.

Tax relief isn't income.  Not really sure what you mean by that.

If she earns £10k in this tax year then she can contribute £10k gross including the tax relief.  She needs to take account of her normal contributions made through her employment.

xylophone

Your mother has "relevant earnings"  and she is contributing to a scheme offering "relief at source".  

Even though her earnings are below her tax free personal allowance, she may still contribute up to £8000  per tax year to the scheme and receive tax relief of up to £2000.

https://www.litrg.org.uk/latest-news/news/181214-do-you-understand-how-tax-relief-your-pension-contributions-works

The tax relief "belongs" to the tax year in which the contribution was made.

Once your mother has no "relevant earnings" (or earnings below £3,600), she is limited to a contribution of £2880 (net)  per tax year for purposes of tax relief.

Paul_Herring

My mum earns approx. £10,000 and yet Fidelity are giving her 25% tax relief. This is wrong, correct? She's a non tax payer so I believe she should only be receiving 20% tax relief. What should she do?

Nothing; she's getting the right amount - you're doing your calculation wrong.

£100 earned (when actually taxed at 20%) results in £80 being paid. When that's paid into a pension fund, that £20 is also reappears. £20 is 25% of £80. And 20% of £100.

You're using that £80 figure (what she puts in) when you should be using the £100 one (what ends up in the pension at the end of it all.)

She's receiving the right amount (presuming you're calculating that 25% as a percentage of what she's paying.)

I was also wondering if tax relief that takes 6-8 weeks to be paid by HMRC and arrives after the start of the new tax year,

Gets counted in the tax year when her contribution was received by the pension company, not when the relief hits the account.

is she allowed to contribute more than that as cash this tax year

She can contribute, in total, and gross, sufficient to cover her gross wage. Given the tax relief that will be added, this is essentially her contributing £8,000, which will get £2,000 tax relief, despite none of it actually getting any tax deducted.

Audaxer

sparky0138 said:

She's retiring next month even though she won't receive state pension until October 2021. She's going to use savings and doesn't plan to drawdown for many years. She's planning to use the £2,880 trick next tax year but is she allowed to contribute more than that as cash this tax year (she's only contributed £1220 plus a little bit to her workplace pension so far) and then either keep it as cash to use for fees in the future or withdraw it once tax relief is paid? Is this classed as draw down?

As others have said she can contribute up to her gross earnings this tax year, including the tax relief and taking account of any workplace pension contributions. Obviously she will have to be quick has only a few days left to contribute this tax year. I think she should be able to withdraw the cash by UFPLS if she wishes once the tax relief is received, and if she has retired with no other earnings, she will not be liable for any tax on the withdrawal.

Paul_Herring

  and taking account of any workplace pension contributions.

Only their own - employer contributions* are excluded from that calculation if they're in the auto-enrolment scheme, for example.

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*Not that it's likely in this instance, but salary-sacrificed contributions also count as employer, not employee contributions.

sparky0138

Thanks ever so much. You've all been a great help. Obviously I got confused by £100 + 25% = £125 and 20% of £125 = £25

Only their own - employer contributions* are excluded from that calculation if they're in the auto-enrolment scheme, for example.

I didn't know that. That's a great help when working out exactly how much more she can contribute. So could someone please correct me if I'm wrong - all she needs to take into account when working out how much more she can put in is...

earnings this tax year - SIPP contributions already made - workplace pension contributions = amount she can still contribute (allowing for tax relief of course)

She also currently receives working tax credit each month though of course that will stop soon. Should that be included in "earnings"?

Thanks.

Paul_Herring

I didn't know that. That's a great help when working out exactly how much more she can contribute.

A more concrete example, to use salary sacrifice as an example:

- Someone normally paid £50,000.

- They salary sacrifice £30,000 into their pension (making that £30,000 an employer contribution, not employee,) bringing their gross wage to £20,000.

They're already getting more into their pension than their gross wage. (Additionally, they can contribute a further £10,000 gross - see below)

earnings this tax year - SIPP contributions already made - workplace pension contributions = amount she can still contribute (allowing for tax relief of course)

No. Simply [gross earnings] - [gross SIPP contributions] = [gross amount she can still contribute]

Ignore the employer contributions here. Given the amounts indicated in your first post, that's all you need.

She also currently receives working tax credit each month though of course that will stop soon. Should that be included in "earnings"?

No. They don't count as 'relevant earnings' for this particular circumstance. Ignore them for this.

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Not applicable in this instance...

There's also another £40,000 limit, as I alluded to in the example at the start of this post. [employee gross] + [employer contributions] cannot be more than £40,000.

At least until the gross earnings start going above £110,000(2019/20)/£200,000(2020/21), where the £40,000 starts getting tapered.

And then there's carry-forward which can raise the amount above £40,000 -[any taper], if not all of the allowance was used in the previous three tax years.

sparky0138

No. Simply [gross earnings] - [gross SIPP contributions] = [gross amount she can still contribute]

Ignore the employer contributions here. Given the amounts indicated in your first post, that's all you need.

Thanks. So that will also apply to the next tax year? She'll receive her last wages at the end of April and presumably there'll be 19 days worth of contributions to her workplace pension. Will she still be able to contribute the full £2,880?

sparky0138

No. Simply [gross earnings] - [gross SIPP contributions] = [gross amount she can still contribute]

Ignore the employer contributions here. Given the amounts indicated in your first post, that's all you need.

Sorry to keep going on about this but I've just come across this page and unless I'm understanding it wrong (quite possible) it seems to contradict what you've said.

https://thepeoplespension.co.uk/help/knowledgebase/whats-the-maximum-amount-i-can-pay-into-my-pension-pot

The maximum contribution could be in the form of regular payments, one-off lump sum or a combination of both. The limit includes the contributions paid into all of your pensions (if you have more than one), includes your personal contributions, tax relief and any contributions that are paid by your employer.

Paul_Herring

https://thepeoplespension.co.uk/help/knowledgebase/whats-the-maximum-amount-i-can-pay-into-my-pension-pot

Ok; I'd wait for someone more confident than I, but I believe that page to be misleading or wrong.

https://www.oldmutualwealth.co.uk/Adviser/literature-and-support/knowledge-direct/pensions/oannual-allowance-and-carry-forward/how-much-can-be-paid-into-a-pension/

Regarding what your mother may put in herself:

Tax relief on personal contributions are limited by relevant UK earnings

Individuals are entitled to tax relief at marginal rate on £3600 or up to 100% of relevant UK earnings for this tax year. For most people, this will be their salary.

Regarding employer contributions:

Employer contributions are not limited by relevant UK earnings

Employer contributions do not receive tax relief in the pension. As no tax relief is given, the employer contribution is not limited to the employee’s earnings like personal contributions.

The link you found appears to be conflating employer contributions with personal contributions.