Which year's income for pension contribution limit? 1 August at 4:58PM in Pensions, Annuities & Retirement Planning 6 replies 219 views

californiasunshine

Here's a question for any accountants or pension rules experts out there, which I hope will be useful for others too:
I'm self-employed and only a few years from retirement. I have some money saved and I want to put it in my Self-Invested Personal Pension (SIPP). UK pension rules say you can't contribute more than 100% of your income each year. My question is, which year's income do you use to calculate that?
For example, my income in the tax year 2019-20 was £30,000. Does that mean that until April 2021 I can put up to £30,000 in my SIPP? Or is the limit my income for 2020-21, whatever that turns out to be? I was guessing that it must be option 1, because if it's option 2 then surely I won't know my income and thus my maximum contribution until the year is done - by which time it's too late, right?
Thanks for your help!
(P.S. I know that you can backdate unused allowance from the past couple of years, but that is still capped at your income - but the same question remains: which income? The year just finished or the current unfinished year?)

MK62

Your gross contribution for a tax year is limited to your income in that same tax year (gross contribution includes any tax relief element added to a SIPP by HMRC)

garmeg

It is the income in the current tax year, i.e. 2020/2021.

squirrelpie

californiasunshine said:

Or is the limit my income for 2020-21, whatever that turns out to be? I was guessing that it must be option 1, because if it's option 2 then surely I won't know my income and thus my maximum contribution until the year is done - by which time it's too late, right?

Well, it's almost too late but not quite. You can pay the money in at The Last Possible Moment in the tax year when you know how much you've earned except for the last few days. Note the the definition of The Last Possible Moment is down to your pension provider - you need to ask them what is the cutoff date before which they will guarantee putting contributions in this year's pot.

Paul_Herring

Or is the limit my income for 2020-21, whatever that turns out to be? I was guessing that it must be option 1, because if it's option 2 then surely I won't know my income and thus my maximum contribution until the year is done - by which time it's too late, right?

It's Option 2.

I'd imagine most people will know how much they've earned in a tax year by, say, March 25th. If you don't, I rather suspect you may have more accounting problems than figuring out how much you can contribute to a pension.

Novice_investor101

It’s the current tax year, as said. & working in pensions/investments this is the main reason why the end of tax year period is bedlam! 

zagfles

You can ask for a refund if you put too much in. Note this applies only to exceeding the 100% of earnings limit, not the annual allowance. See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm045000#Refundecls