Query about lump sum payments

Cypruseast

Probably a bit of a stupid question but how do pension lump sum payments work? I’ve only ever had a work based DB and a DC pension where I have salary sacrificed money every month so don’t quite understand how any lump sum payments work.

I’m watching with interest any potential change to pension policy from the UK government in regards to higher rate pension relief. I doubt in reality they will do anything to change this given political fall out but the option of a lump sum always exists anyhow. So...on the basis of this (assuming my pension provider - Aviva allows it) if I was to make a one off lump sum payment into my pension what, if any are the tax benefits from doing this if I am a higher rate PAYE tax payer? I earn about £66k per annum (inc benefits) and am currently sacrificing just over £10k/annum into my pension and childcare vouchers so there isn’t loads taxed at the 40% rate as it is...

Any advice/thoughts would be appreciated. 

Dazed_and_C0nfused

If it's a relief at source contribution then it's just the same as smaller payments.

The pension provider adds the 25% and then you can claim any additional relief due from HMRC. 

If you pay over say £8,000 then the pension company will add £2,000 giving you a gross contribution of £10,000.

Your basic rate tax band is increased by £10,000 meaning you can pay more basic rate tax (20%) and pay less higher rate tax (40%).

The actual personal tax benefit will depend on your total taxable income for the year and how this is split between earnings/pension income, savings interest and dividends.

Cypruseast

Dazed_and_C0nfused said:

If it's a relief at source contribution then it's just the same as smaller payments.

The pension provider adds the 25% and then you can claim any additional relief due from HMRC. 

If you pay over say £8,000 then the pension company will add £2,000 giving you a gross contribution of £10,000.

Your basic rate tax band is increased by £10,000 meaning you can pay more basic rate tax (20%) and pay less higher rate tax (40%).

The actual personal tax benefit will depend on your total taxable income for the year and how this is split between earnings/pension income, savings interest and dividends.

The current pension contributions I am paying into are handled as a Net Pay arrangement rather than reliefs at source. 

So am I right in saying based on what you are saying that any lump sum is handled as a relief at source arrangement so a tax return would be required and I can claim the additional 20% back that way. 

For sake of arguing how does it work if I was to pay in an additional £32800 taking me to the annual £40k allowance? Am I right in saying I would pay in £26,240 and claim back an extra 20% on that figure or am I wrong in that assumption? 

zagfles

Are you talking about making the lump sum payment to your workplace pension, and not through your payslip? If so you'll have to ask the pension provider or your employer how it works, unlikely to be RAS, more likely to be treated as a one off lump sum on which you'd have to claim full tax relief.

Dazed_and_C0nfused

Cypruseast said:

Dazed_and_C0nfused said:

If it's a relief at source contribution then it's just the same as smaller payments.

The pension provider adds the 25% and then you can claim any additional relief due from HMRC. 

If you pay over say £8,000 then the pension company will add £2,000 giving you a gross contribution of £10,000.

Your basic rate tax band is increased by £10,000 meaning you can pay more basic rate tax (20%) and pay less higher rate tax (40%).

The actual personal tax benefit will depend on your total taxable income for the year and how this is split between earnings/pension income, savings interest and dividends.

The current pension contributions I am paying into are handled as a Net Pay arrangement rather than reliefs at source. 

So am I right in saying based on what you are saying that any lump sum is handled as a relief at source arrangement so a tax return would be required and I can claim the additional 20% back that way. 

For sake of arguing how does it work if I was to pay in an additional £32800 taking me to the annual £40k allowance? Am I right in saying I would pay in £26,240 and claim back an extra 20% on that figure or am I wrong in that assumption? 

I had assumed that it would be relief at source as individual contributions, outside the payroll process, are almost always relief at source.

But if you are already using the net pay method it is possible your lump sum could be paid gross with no tax relief whatsoever given at the point the payment is made.

This method is most commonly used for public sector DB schemes.

If you do use this method you have to claim any tax relief due from HMRC.  The contribution works a bit like the Personal Allowance and reduces the tax you would be due to pay, any tax relief due comes back to you, it doesn't go to the pension scheme/fund.

But I would recommend you understand what method will be used before doing anything else so you can then understand the tax benefits.

Cypruseast

zagfles said:

Are you talking about making the lump sum payment to your workplace pension, and not through your payslip? If so you'll have to ask the pension provider or your employer how it works, unlikely to be RAS, more likely to be treated as a one off lump sum on which you'd have to claim full tax relief.

Yes, sorry I wasn’t clear about that. I am thinking of making a one off payment to the workplace pension but not through my payslip (if allowed of course). 

Cypruseast

Dazed_and_C0nfused said:

Cypruseast said:

Dazed_and_C0nfused said:

If it's a relief at source contribution then it's just the same as smaller payments.

The pension provider adds the 25% and then you can claim any additional relief due from HMRC. 

If you pay over say £8,000 then the pension company will add £2,000 giving you a gross contribution of £10,000.

Your basic rate tax band is increased by £10,000 meaning you can pay more basic rate tax (20%) and pay less higher rate tax (40%).

The actual personal tax benefit will depend on your total taxable income for the year and how this is split between earnings/pension income, savings interest and dividends.

The current pension contributions I am paying into are handled as a Net Pay arrangement rather than reliefs at source. 

So am I right in saying based on what you are saying that any lump sum is handled as a relief at source arrangement so a tax return would be required and I can claim the additional 20% back that way. 

For sake of arguing how does it work if I was to pay in an additional £32800 taking me to the annual £40k allowance? Am I right in saying I would pay in £26,240 and claim back an extra 20% on that figure or am I wrong in that assumption? 

I had assumed that it would be relief at source as individual contributions, outside the payroll process, are almost always relief at source.

But if you are already using the net pay method it is possible your lump sum could be paid gross with no tax relief whatsoever given at the point the payment is made.

This method is most commonly used for public sector DB schemes.

If you do use this method you have to claim any tax relief due from HMRC.  The contribution works a bit like the Personal Allowance and reduces the tax you would be due to pay, any tax relief due comes back to you, it doesn't go to the pension scheme/fund.

But I would recommend you understand what method will be used before doing anything else so you can then understand the tax benefits.

Hmmmm maybe I’m just getting a little confused about this. I pay £500 out of my salary and £625 is paid into my pension. The additional 20% higher rate relief is already calculated within my net pay - so I don’t currently have to claim the additional relief through a tax return....so have I actually got it mixed up and is that relief at source?? Doh feel a bit daft here!! 

Dazed_and_C0nfused

Cypruseast said:

Dazed_and_C0nfused said:

Cypruseast said:

Dazed_and_C0nfused said:

If it's a relief at source contribution then it's just the same as smaller payments.

The pension provider adds the 25% and then you can claim any additional relief due from HMRC. 

If you pay over say £8,000 then the pension company will add £2,000 giving you a gross contribution of £10,000.

Your basic rate tax band is increased by £10,000 meaning you can pay more basic rate tax (20%) and pay less higher rate tax (40%).

The actual personal tax benefit will depend on your total taxable income for the year and how this is split between earnings/pension income, savings interest and dividends.

The current pension contributions I am paying into are handled as a Net Pay arrangement rather than reliefs at source. 

So am I right in saying based on what you are saying that any lump sum is handled as a relief at source arrangement so a tax return would be required and I can claim the additional 20% back that way. 

For sake of arguing how does it work if I was to pay in an additional £32800 taking me to the annual £40k allowance? Am I right in saying I would pay in £26,240 and claim back an extra 20% on that figure or am I wrong in that assumption? 

I had assumed that it would be relief at source as individual contributions, outside the payroll process, are almost always relief at source.

But if you are already using the net pay method it is possible your lump sum could be paid gross with no tax relief whatsoever given at the point the payment is made.

This method is most commonly used for public sector DB schemes.

If you do use this method you have to claim any tax relief due from HMRC.  The contribution works a bit like the Personal Allowance and reduces the tax you would be due to pay, any tax relief due comes back to you, it doesn't go to the pension scheme/fund.

But I would recommend you understand what method will be used before doing anything else so you can then understand the tax benefits.

Hmmmm maybe I’m just getting a little confused about this. I pay £500 out of my salary and £625 is paid into my pension. The additional 20% higher rate relief is already calculated within my net pay - so I don’t currently have to claim the additional relief through a tax return....so have I actually got it mixed up and is that relief at source?? Doh feel a bit daft here!! 

I think you are getting confused.

If you contribute £500 under "net pay" then only £500 goes into your pension.  But (on taxsble of £66k) you would pay £200 less tax than you would normally pay.  Net pay ensures you receive he maximum possible tax relief immediately through your pay.  There is never any need (or possibility) of claiming anything extra from HMRC.

What you seem to be describing is relief at source i.e. £500 is taken from your net pay (after tax and NI) and the pension company adds the basic rate tax relief giving you £625 in your pension fund.  If additional tax relief is due then you get this from HMRC, it never gets paid into your pension fund.

Albermarle

It would probably be a lot simpler just to ask your employer to increase your salary sacrifice % and not worry about adding a lump sum . Plus you will get a NI benefit .

Cypruseast

Dazed_and_C0nfused said:

Cypruseast said:

Dazed_and_C0nfused said:

Cypruseast said:

Dazed_and_C0nfused said:

If it's a relief at source contribution then it's just the same as smaller payments.

The pension provider adds the 25% and then you can claim any additional relief due from HMRC. 

If you pay over say £8,000 then the pension company will add £2,000 giving you a gross contribution of £10,000.

Your basic rate tax band is increased by £10,000 meaning you can pay more basic rate tax (20%) and pay less higher rate tax (40%).

The actual personal tax benefit will depend on your total taxable income for the year and how this is split between earnings/pension income, savings interest and dividends.

The current pension contributions I am paying into are handled as a Net Pay arrangement rather than reliefs at source. 

So am I right in saying based on what you are saying that any lump sum is handled as a relief at source arrangement so a tax return would be required and I can claim the additional 20% back that way. 

For sake of arguing how does it work if I was to pay in an additional £32800 taking me to the annual £40k allowance? Am I right in saying I would pay in £26,240 and claim back an extra 20% on that figure or am I wrong in that assumption? 

I had assumed that it would be relief at source as individual contributions, outside the payroll process, are almost always relief at source.

But if you are already using the net pay method it is possible your lump sum could be paid gross with no tax relief whatsoever given at the point the payment is made.

This method is most commonly used for public sector DB schemes.

If you do use this method you have to claim any tax relief due from HMRC.  The contribution works a bit like the Personal Allowance and reduces the tax you would be due to pay, any tax relief due comes back to you, it doesn't go to the pension scheme/fund.

But I would recommend you understand what method will be used before doing anything else so you can then understand the tax benefits.

Hmmmm maybe I’m just getting a little confused about this. I pay £500 out of my salary and £625 is paid into my pension. The additional 20% higher rate relief is already calculated within my net pay - so I don’t currently have to claim the additional relief through a tax return....so have I actually got it mixed up and is that relief at source?? Doh feel a bit daft here!! 

I think you are getting confused.

If you contribute £500 under "net pay" then only £500 goes into your pension.  But (on taxsble of £66k) you would pay £200 less tax than you would normally pay.  Net pay ensures you receive he maximum possible tax relief immediately through your pay.  There is never any need (or possibility) of claiming anything extra from HMRC.

What you seem to be describing is relief at source i.e. £500 is taken from your net pay (after tax and NI) and the pension company adds the basic rate tax relief giving you £625 in your pension fund.  If additional tax relief is due then you get this from HMRC, it never gets paid into your pension fund.

Yep that is what is occurring - thanks for clarifying that. I read that the additional 20% needs to be claimed back in regards to the salary sacrifice if it is relief at source which threw me. That’s not the case for me so apologies for that. 

Cypruseast

Albermarle said:

It would probably be a lot simpler just to ask your employer to increase your salary sacrifice % and not worry about adding a lump sum . Plus you will get a NI benefit .

Yea that will probably be the easier thing and once the world settles down a little then I’ll probably review my position and increase my salary sacrifice so that I end up at a lower rate tax position as my outgoings are not huge and I can afford a reduced take home pay.