The £40,000 annual allowance, and the £1M cap

GunJack

you should just pay "x" into private pension, and the provider will claim the tax and add it to the pot for you, no need for tax returns.

noClue

GunJack said:

you should just pay "x" into private pension, and the provider will claim the tax and add it to the pot for you, no need for tax returns.

Since "x" will be the max spare I "carried forward" (due to the DB pension), if the provideo claim the tax and add it into the pot, won't I then exceed my max allowance with tax relief? Thanks.

Linton

The problem is that you wont know the PIA until after the end of the tax year when it is too late to make an extra pension contribution.  So you will have to make a prudent guess. Carry over from the previous tax year would help.

If x is the gap between £40K and the DB pension allocation then you would actually contribute 80% of x to a personal pension.  When talking about personal pension contributions you should always use the gross value and then discount this by the tax refund when actually making the payment.  Otherwise it is remarkably easy to get very confused.

noClue

Hi @Linton, yes "x" is what you said, the gross value of the gap. Thanks, I think you answered my question!

zagfles

noClue said:

GunJack said:

you should just pay "x" into private pension, and the provider will claim the tax and add it to the pot for you, no need for tax returns.

Since "x" will be the max spare I "carried forward" (due to the DB pension), if the provideo claim the tax and add it into the pot, won't I then exceed my max allowance with tax relief? Thanks.

Yes. It sounds like you're likely to have loads of carry forwards available, assuming you've only been contributing to the TPS for the last few years with no extra contributions anywhere. So your situation is like the Pru link, except in the Pru example the client had no carry forwards available, you probably do.

So as you're likely to have loads of available annual allowance inc carry forwards, your limit will be the tax relief limit, ie your earnings minus your contributions to the TPS.

Obviously in future years, if you carry on maxing pension contributions, you'll use up all your carry forwards of AA, and then the AA will become the limit like in the Pru example. It will then become more tricky, as the PIA for a DB scheme is hard to work out as stuff like indexation and payrises will affect it, and if you don't get the PIA from the scheme till after the end of the tax year it's then too late to contribute for that tax year.

If you exceed the available AA (that is inc any carry forwards) then you have to pay a tax charge. If you exceed the tax relief limit, you can ask for the excess back from the provider. If you haven't exceeded any limits, you don't need to tell anyone. But keep a note of your calculations so you can show HMRC if they ask.

HL have a carry forwards calculator - note for a DB scheme you need use the PIA for the scheme (NOT contributions), for a DC scheme use contributions. https://www.hl.co.uk/pensions/contributions/carry-forward-rule/annual-allowance-calculator

noClue

Thanks @zagfles I think I completely get it now. The good thing is when I say maxing out, in reality I would probably contribute to pension a lot more but not 100% max out so even guessing current PIA wouldn't be that much a problem.

Thanks man great help!