Annual Allowance £40,000

Prism

bargainhunter888 said:

Hi All
Can I just clarify the £40k allowance, as it covers both mine & employers contributions, which is 10% of my salary a year, am i right in thinking i'd have have to earn £400k P/A to worry about this allowance?
reading a lot of posts worrying about this limit, are people on this forum seriously high earners or that they & their employers are very generous with their contributions? even if it was 25% total contribution, someone would have to earn £160k a year!
also where does the £3,600 limit come from? confused by this

Thanks 

People are free to contribute more than 25% if they wish. Once you become a higher tax payer there are diminishing returns for any extra income and so some people simply pump a larger chunk into their pension. 

Malthusian

bargainhunter888 said:

Hi All
Can I just clarify the £40k allowance, as it covers both mine & employers contributions, which is 10% of my salary a year, am i right in thinking i'd have have to earn £400k P/A to worry about this allowance?

No. Lots of people with considerably lower earnings than 400k exceed the annual allowance. The easiest way to do it is to be a member of a defined benefit pension scheme.

People may have cash stored up in their business or their own hands and want to start maximising contributions now they are confident enough that they can tie the money up.

There is a taboo about acknowledging that higher earners get more benefit from pension tax relief than low ones because that's how it's supposed to work. Tax breaks will always benefit high earners more than low ones, regardless of how politicians try to defy reality, because they have more money to pay tax on. The good side of the coin, from the government's perspective, is that they have more money to pay tax on. That is why 90% of tax is paid by the top 50% and 30% by the top 1%.

Designing a system that encourages people to save money for their retirement providing they don't have any money to save for their retirement (because otherwise they're greedy capitalists and don't deserve tax breaks) would be a bit pointless.

ratechaser

Malthusian said:

bargainhunter888 said:

Hi All
Can I just clarify the £40k allowance, as it covers both mine & employers contributions, which is 10% of my salary a year, am i right in thinking i'd have have to earn £400k P/A to worry about this allowance?

No. Lots of people with considerably lower earnings than 400k exceed the annual allowance. The easiest way to do it is to be a member of a defined benefit pension scheme.

People may have cash stored up in their business or their own hands and want to start maximising contributions now they are confident enough that they can tie the money up.

There is a taboo about acknowledging that higher earners get more benefit from pension tax relief than low ones because that's how it's supposed to work. Tax breaks will always benefit high earners more than low ones, regardless of how politicians try to defy reality, because they have more money to pay tax on. The good side of the coin, from the government's perspective, is that they have more money to pay tax on. That is why 90% of tax is paid by the top 50% and 30% by the top 1%.

Designing a system that encourages people to save money for their retirement providing they don't have any money to save for their retirement (because otherwise they're greedy capitalists and don't deserve tax breaks) would be a bit pointless.

Let's not forget that if you were on 400k, tapering would mean you wouldn't have a 40k pension allowance anyway - it would have reduced to 4K...

But yes, plenty of ways to get that much in, be it overpayments into an employer scheme or using a separate SIPP for lump sum additions (both of which I've done).

Interesting gov data on the split of where tax comes from. You'd think there
might be a little less opprobrium about people earning larger amounts, but few people take the time to acknowledge that they are the ones substantially funding the infrastructure that supports them. Yet more proof that we don't live in a particularly rational world...

bargainhunter888

so basically if you are a higher rate tax payer or would be, people would lump more into the pension so get 20% relief rather than paying 40% tax? 
can someone show me some calculations of this scenario as pensions come out as salary sacrifice is the relief added on from the company or when it goes into the pension provider?
what happens if say someone earns £20k a year, but has rental income of £30k pushing them over the limit higher earnings limit
Thanks 

Albermarle

If you make pensions contributions by salary sacrifice then you do not pay any tax on them in the first place , so no further relief claimable.
If you make contributions separately out of income that has been already taxed , then the pension provider adds basic rate tax relief. If you earning enough to pay some higher rate tax then you inform HMRC and they adjust your tax calculation so you pay less tax .
what happens if say someone earns £20k a year, but has rental income of £30k pushing them over the limit higher earnings limit
With an income £50K you just reach the 40% tax limit but you can only claim higher rate tax relief for 40% tax you have actually paid . Which in this case is zero.

bargainhunter888

Albermarle said:

If you make pensions contributions by salary sacrifice then you do not pay any tax on them in the first place , so no further relief claimable.
If you make contributions separately out of income that has been already taxed , then the pension provider adds basic rate tax relief. If you earning enough to pay some higher rate tax then you inform HMRC and they adjust your tax calculation so you pay less tax .
what happens if say someone earns £20k a year, but has rental income of £30k pushing them over the limit higher earnings limit
With an income £50K you just reach the 40% tax limit but you can only claim higher rate tax relief for 40% tax you have actually paid . Which in this case is zero.

I see, so the way to look at it from my point of view is that the pension is deducted before tax so i cant add an extra 20%
thought it was a bit fishy why i would get an extra 20% on top of what is coming out.

Albermarle

I see, so the way to look at it from my point of view is that the pension is deducted before tax so i cant add an extra 20%
thought it was a bit fishy why i would get an extra 20% on top of what is coming out.

Yes that is correct for you.  Some people pay contributions from their net/taxed pay and in this case tax relief can be claimed. It depends on what system the employer is using.

mither_2

ratechaser said:

Thrugelmir said:

£40k pa limit is sufficient to provide people with an adequate pension provision. 

I have to agree, I fully expect that once the current government spending spree needs to start being repaid, these limits will come down quite a bit further. 

It's quite embarrassing just how much tax efficiency I get from pensions every year, given that I'm by any reasonable definition a high earner. I consider myself fortunate and I don't think my children will get the same benefits...

How much tax efficiency you get each year? Isn't the tax free pension contribution capped at £40k per year? How do you get more tax efficiency than this?
I'm in the fortunate position where I have savings and would rather put more money into my pension rather than pay it in tax. I'm keen to try and build up my pension now whilst I have no children and so limited outgoings. Am I missing something?   

mither_2

ratechaser said:

georgehere said:

ratechaser:

work out how much NI you have contributed and consider the picture as a whole before you start feeling too guilty

Oh certainly, and I vaguely recall the howls of rage when the uncapped 1% (and subsequently 2%) NI charge first came in - because we all know it's just income tax by another name. 

But there's 2 sides to this... 

Firstly in relative terms, I have paid a pretty hefty chunk compared to others that will end up getting the same pension and NHS provision - and as I also have private healthcare (the cost of which is paid for by my employer but which I am taxed on as a benefit in kind), I'm actually  using the NHS less than many others. So I could feel aggrieved for paying more than my 'fair' share.

However, secondly... in absolute terms, if my 30 years of NI cons, which started off sub-£100 a year, and only got really big about 10 years ago, were used to fund a D.C. pension, I doubt they would get me an annuity nearly as big as what my state pension will ultimately provide for. And yes I know I will keep on paying NI, although hopefully for not many more years! 

So I can't grumble all that much...

I have a query on Private Healthcare as a Benefit in Kind and not sure where to put it so now seems like a good place. 
My salary is £105k per year therefore I get no income tax relief. I pay £100 per month for my BUPA care totalling. Fortunately I rarely ever use the cover and so was thinking of cancelling it. 
If I cancelled the policy would I save this money or would it just be taken up in tax payments?  
 

ratechaser

mither_2 said:

ratechaser said:

georgehere said:

ratechaser:

work out how much NI you have contributed and consider the picture as a whole before you start feeling too guilty

Oh certainly, and I vaguely recall the howls of rage when the uncapped 1% (and subsequently 2%) NI charge first came in - because we all know it's just income tax by another name. 

But there's 2 sides to this... 

Firstly in relative terms, I have paid a pretty hefty chunk compared to others that will end up getting the same pension and NHS provision - and as I also have private healthcare (the cost of which is paid for by my employer but which I am taxed on as a benefit in kind), I'm actually  using the NHS less than many others. So I could feel aggrieved for paying more than my 'fair' share.

However, secondly... in absolute terms, if my 30 years of NI cons, which started off sub-£100 a year, and only got really big about 10 years ago, were used to fund a D.C. pension, I doubt they would get me an annuity nearly as big as what my state pension will ultimately provide for. And yes I know I will keep on paying NI, although hopefully for not many more years! 

So I can't grumble all that much...

I have a query on Private Healthcare as a Benefit in Kind and not sure where to put it so now seems like a good place. 
My salary is £105k per year therefore I get no income tax relief. I pay £100 per month for my BUPA care totalling. Fortunately I rarely ever use the cover and so was thinking of cancelling it. 
If I cancelled the policy would I save this money or would it just be taken up in tax payments?  
 

Not really my area of expertise but I understood private healthcare to be a taxable BIK - I'm sure I end up with it reflected as notional income on my pay statements, but to be honest, it's not something I've paid a lot of attention to. 

In any event, you really do need to think about at least ensuring your taxable income is brought down to below the 100k mark (e.g through pension contributions) so you're not ending up with an effective 62% tax rate on that "just over 100k" slice...

As to your other post, yes 40k is the maximum annual allowance, but in reality I paid 55k into pensions last year as a result of using up some prior year carryover. And between tax relief and employer contributions, that 55k only cost me the equivalent of about 15k in net pay. Not all tax relief I have to stress, but it is an astonishingly good deal for higher earners that can afford to lock the money away for the future...