Annual Allowance - headed to exceed it, but does it really matter?

Simes122

Hi,

I'm heading towards retirement by around my 57th birthday in less than a year and have been sal sac earnings into the DC part of my USS (University) pension.  I've knowingly been contributing greater than my £40k annual allowance, this and part of last tax year. As a consequence this tax year, I'll breach that annual allowance plus my unused carry forward amounts from the previous tax years by between £3-5k.  This leaves me with a tax liability.  

I panicked and reduced my sal sac amount to bring myself on or close to the Annual Allowance (plus unused CF) by end of this Tax Year.  But realised (I think) that the only effect is to shift my tax liability to my PAYE, and by reducing my sal sac amount, I will then also pay more NI.  Whereas if I just accepted the tax liability in my pension I'd avoid the cost of NI (12% as I only pay myself min wage after sal sac - I have other forces pension income).  USS also allows scheme pays for tax liability of £1000 or more.

My question is am I right in thinking I'm still better maxing out my Sal Sac and breaching the annual allowance because of the NI saving described above - ie, am I understanding things correctly?  I understand that the charge I'm liable for when I do my self assessment is no worse than the tax liability I'd have under PAYE/Self Assessment in any case?  (Overall I'm a HR taxpayer).

Thanks,

Simon

cloud_dog

The problem is that you are not making the payment and you will not be the one facing any penalties.  SS contributions are all employer contributions.  You may find your employer being a little miffed.

EdSwippet

Simes122 said:

My question is am I right in thinking I'm still better maxing out my Sal Sac and breaching the annual allowance because of the NI saving described above - ie, am I understanding things correctly?  I understand that the charge I'm liable for when I do my self assessment is no worse than the tax liability I'd have under PAYE/Self Assessment in any case?  (Overall I'm a HR taxpayer).

Maybe, or maybe not. Don't forget that at least 75% of what remains of this contribution in your pension, after using 'scheme pays' to cover your tax liability for exceeding the annual allowance, is taxable on withdrawal. Likely double-tax, then.

For example, on the numbers you gave, £100 taken as PAYE salary might cost you £12 in NI and £40 in tax (higher rate) leaving you £48. Conversely, £100 contributed to a pension as salary sacrifice but above the annual allowance costs you £40 in tax, which under 'scheme pays' reduces the effective pension input to £60. On withdrawal of this £60, assuming you remain below the 'lifetime allowance':

• If a basic rate taxpayer, £9 in tax (25% PCLS, then 20% tax on the remainder) leaving £51.
• If a higher rate taxpayer, £18 in tax (25% PCLS, then 40% on the remainder), leaving £42.

Notice the asymmetry. You gain 3% if you guess this right, but lose 6% if you guess it wrong. If you cannot use 'scheme pays', the numbers above become worse; specifically, £45 and £30, making both outcomes into losing strategies. A generous employer match or employer NI uplift on DC contributions can change the balance here, but you didn't mention one.

Simes122

cloud_dog said:

The problem is that you are not making the payment and you will not be the one facing any penalties.  SS contributions are all employer contributions.  You may find your employer being a little miffed.

From what I read, it is not in any way shape or form a penalty charge.  While my employer makes a contribution, it is me that faces any tax liability.  

Simes122

EdSwippet said:

Simes122 said:

My question is am I right in thinking I'm still better maxing out my Sal Sac and breaching the annual allowance because of the NI saving described above - ie, am I understanding things correctly?  I understand that the charge I'm liable for when I do my self assessment is no worse than the tax liability I'd have under PAYE/Self Assessment in any case?  (Overall I'm a HR taxpayer).

Maybe, or maybe not. Don't forget that at least 75% of what remains of this contribution in your pension, after using 'scheme pays' to cover your tax liability for exceeding the annual allowance, is taxable on withdrawal. Likely double-tax, then.

For example, on the numbers you gave, £100 taken as PAYE salary might cost you £12 in NI and £40 in tax (higher rate) leaving you £48. Conversely, £100 contributed to a pension as salary sacrifice but above the annual allowance costs you £40 in tax, which under 'scheme pays' reduces the effective pension input to £60. On withdrawal of this £60, assuming you remain below the 'lifetime allowance':

• If a basic rate taxpayer, £9 in tax (25% PCLS, then 20% tax on the remainder) leaving £51.
• If a higher rate taxpayer, £18 in tax (25% PCLS, then 40% on the remainder), leaving £42.

Notice the asymmetry. You gain 3% if you guess this right, but lose 6% if you guess it wrong. If you cannot use 'scheme pays', the numbers above become worse; specifically, £45 and £30, making both outcomes into losing strategies. A generous employer match or employer NI uplift on DC contributions can change the balance here, but you didn't mention one.

Thanks - that makes complete sense to me.  I hadn't considered the double taxation element.   I'll modify the amount I sacrifice to leave me as bang on to my annual allowance plus carry forward as I can then.   I don't get an NI uplift nor match on contributions on the DC element (it's a hybrid scheme).  And I think I'll be a HR Taxpayer in retirement - not hugely over the threshold, but the threshold remains lower in Scotland unfortunately.

ussdave

Does the above still apply as stated when you factor in the combined DB/DC nature of USS?  So, assuming the final DC withdrawal total is below 25% of the total value, double taxation will not apply...?

ukjoel

I may be wrong and have never looked at it that closely as never been lucky enough to have the cash to exceed the annual allowance but I thought you could carry forward the allowance you were allowed from the previous 3 tax years.  You are only talking about this year and last year?

Google carry forward allowance - worth a look.

Simes122

ukjoel said:

I may be wrong and have never looked at it that closely as never been lucky enough to have the cash to exceed the annual allowance but I thought you could carry forward the allowance you were allowed from the previous 3 tax years.  You are only talking about this year and last year?

Google carry forward allowance - worth a look.

Yes it’s current year plus the previous three.  Unfortunately I was over last year by 5k which was ok, but with this year 40k allowance, last year has nothing to give me, and the previous two have about 18k cf available.  This year I was scheduled to put in around 62-63k which takes me over.  I’ve just dialled back a bit on my Sal sac but that exposes the extra I’ll now get to 41% tax and 12% NI.  So I will pay something whatever i do it seems.

Simes122

ussdave said:

Does the above still apply as stated when you factor in the combined DB/DC nature of USS?  So, assuming the final DC withdrawal total is below 25% of the total value, double taxation will not apply...?

I’m not sure if I’m honest!  I guess tax free is tax free.  You might be on to something.  I thought the only reality of an overpayment is that I’ll effectively had relief of 41% that I shouldn’t have, so that is repayable by a tax charge of 41% on the amount of overage.  Which would have happened via paye in any case if I’d not overpaid.  Except the overpayment via Sal sac also saved me 12% ni.   If I withdraw then the first 25% is tax free and the balance at my marginal rate so in my head it felt like still a 12% gain - or avoided ‘tax’.  I’m really not sure lol

greatkingrat

It will depend on the exact figures, but you may be better off from an NI perspective continuing your normal contributions and then stopping salary sacrifice completely for the last month or two of the year. By doing that it is likely some of your earnings will be over the Upper Earnings Limit and only liable to 2% NI, not 12%.