Maximum amounts that can be paid into a SIPP

aroominyork

Dazed_and_C0nfused said:

using the previous three years’ unused allowances – and thereby get a 6.25% gain (based on £100 becoming £125 when invested, then £75 taxed at 20% and £25 untaxed)?

How much do you expect her to earn in the current tax year?

£55k.

dunstonh said:

We transferred that job’s DC pension into her SIPP and recently had a clear out of paperwork, so no trace. It’s not a big problem… I can work on 10% assumption which it wasn’t more than.

Is carry forward likely to be used again next year or the year after?     Just wondering if you need to be accurate as its three years worth of unused plus current.   If its not going to be used again in the near future then you just need to be sure there is £40k available over the previous 3 years.

Possibly Yes. My wife has a fair bit in ISAs so we might be able to mop up all her unused £40k balances by making transfers from ISAs into SIPPs if it is a good idea - hence my question whether the 6.25% 'bonus' is correct.

bowlhead99

aroominyork said:
Possibly Yes. My wife has a fair bit in ISAs so we might be able to mop up all her unused £40k balances by making transfers from ISAs into SIPPs if it is a good idea - hence my question whether the 6.25% 'bonus' is correct.

You always use your current year allowance first, and whatever she puts in is limited to your current year earnings and your employer's contributions, so if the employer is putting in say £3k taking the gross amount that's allowed to go into a pension to £58k, she can only use up to £18k of previous years carry-forward allowances on top of her standard £40k annual allowance.

As such, unless she gets a big pay rise or bonus it will be hard to 'mop up' all her unused £40k balances from previous years because they will be dropping off the end of the 3-year list before she gets through them - e.g. wife and employer put £5k into a pension three tax years earlier (2017/18) theoretically have £35k gross allowance left from that tax year, get to use £18k of it now, but by next year (2021/22) the remaining £17k unused allowance from 2017/18 is no longer an unused allowance from within the last three tax years and nothing can be done about it.

Next year 2021/22 perhaps she has £60k that could go into a pension between her gross salary and her employer's pension contributions, but she will get another £40k allowance for 2021/22 (assuming no change from the Chancellor) so would only be able to use up £20k of carry forward from 2018/19 or 2019/20 before she has covered her entire income and employer contribution, and so will have a load of other carry forward that again can't in practice be used, so will just get lost.

Your maths is right that if she has ISA money that she doesn't mind stuffing into a pension for a while the effective 'boost' from getting 20% relief (£80 becomes £100) and then paying tax at 20% on the taxable 75% of the £100 to get it out again, will leave you with £85, which is a boost of 5/80ths of the money that was originally in the ISA, or 6.25%.

The only potential negative in raiding all her ISA money to stuff the pension is that depending on income levels and cashflow needs, pension withdrawals may need to be more carefully managed than ISA withdrawals. 

E.g. if she decided she wanted to grab (say) £60k from her investments to spend on something, and took if from the pension, the sudden receipt of £45k taxable within a tax year on top of whatever income she was already taking during the tax year could take her over a tax threshold to higher rate tax for that year, paying 40% tax on some of the money rather than 20% which had been assumed in the maths that had said it was a 6.25% boost. If she got only basic rate relief on the contribution but had to pay higher rate tax to get it out in some unforseen circumstance, she'd have lost rather than gained from the process.

zagfles

aroominyork said:

We transferred that job’s DC pension into her SIPP and recently had a clear out of paperwork, so no trace. It’s not a big problem… I can work on 10% assumption which it wasn’t more than.

If i) tax rates and pension rules stay generally the same and ii) we will be basic rate taxpayers after retirement and iii) we have investments intended for post-retirement in both SIPPs and ISAs and iv) will not need to draw on the ISA funds pre-retirement, then does it make sense to transfer ISA funds into SIPPs – using the previous three years’ unused allowances – and thereby get a 6.25% gain (based on £100 becoming £125 when invested, then £75 taxed at 20% and £25 untaxed)?

6.25% is correct though the figures above are confusing, the principle is right.

zagfles

aroominyork said:

Can I please check amounts that can be paid into a SIPP? Is it correct that the maximum is £40,000 pa when including employer's and employee's workplace contributions? So if employer's and employee's contributions to a workplace scheme are 8% of £55,000 (ie £4,400), I can pay into my SIPP £35,600 gross after basic rate tax is reclaimed, so £28,480 net? And on top of this I can reclaim the difference between basic and higher rate tax that was paid on the gross amount? 

Is it also right that if I did not use up my £40,000 allowances in the previous three tax years the unused amounts carry forward, so (again with 8% workplace contributions) I can potentially pay into the SIPP (55,000 - (55,000 * 8%) *0.8) = £40,480?

Slightly more, the last calculation, which you seem to correctly understand is the tax relief limit, should be salary minus your contributions, employer conts are not relevant for the tax relief limit (but are relevant for the annual allowance).

Also your bracketing is wrong though the result reflects what you meant. Assuming employer conts 3% and employee 5%, it should be (55,000 - (55,000 * 5%) ) *0.8

aroominyork

bowlhead99 said:

aroominyork said:
Possibly Yes. My wife has a fair bit in ISAs so we might be able to mop up all her unused £40k balances by making transfers from ISAs into SIPPs if it is a good idea - hence my question whether the 6.25% 'bonus' is correct.

You always use your current year allowance first, and whatever she puts in is limited to your current year earnings and your employer's contributions, so if the employer is putting in say £3k taking the gross amount that's allowed to go into a pension to £58k, she can only use up to £18k of previous years carry-forward allowances on top of her standard £40k annual allowance.

I thought the max that could be paid in each year was gross salary; thanks for explaining that it is gross salary plus employer's pension contribution.

I haven't quoted the rest of your post, bowlhead, but the point about unused balances dropping off before they can be used is well taken.

bowlhead99

aroominyork said:

bowlhead99 said:

aroominyork said:
Possibly Yes. My wife has a fair bit in ISAs so we might be able to mop up all her unused £40k balances by making transfers from ISAs into SIPPs if it is a good idea - hence my question whether the 6.25% 'bonus' is correct.

You always use your current year allowance first, and whatever she puts in is limited to your current year earnings and your employer's contributions, so if the employer is putting in say £3k taking the gross amount that's allowed to go into a pension to £58k, she can only use up to £18k of previous years carry-forward allowances on top of her standard £40k annual allowance.

I thought the max that could be paid in each year was gross salary; thanks for explaining that it is gross salary plus employer's pension contribution.

I haven't quoted the rest of your post, bowlhead, but the point about unused balances dropping off before they can be used is well taken.

The amount that you can pay in is your gross salary but your employer can contribute for you as well. Both employer and employee pension input amount count towards the annual allowance limit (40k plus carry forward) but the employer contribution does not count against your salary limit as the employer contribution is not salary.

Albermarle

As your wife is earning £55K she will be paying some higher rate tax , so the benefit on that part will be significantly more than 6.25% .

zagfles

Albermarle said:

As your wife is earning £55K she will be paying some higher rate tax , so the benefit on that part will be significantly more than 6.25% .

Yes but OP was talking about using carry fowards to transfer ISAs to a SIPP, so already having contributed well over the small amount in the higher rate tax band.

aroominyork

So to check I have this right:

·         salary £55,000

·         3% employer's pension £1650

·         5% employee's pension £2750

·         £2500 net / £3125 gross already paid into SIPP this year

·         So £7525 pension contributions so far this year

·         Assuming sufficient carry forward allowance, can make additional gross contribution of £55,000 less £2750 less £3125 = £49,125, or £39,300 net.

Is that it?