Max pension contribution (gross vs net) and taxes above max

ruggiero

Hi,

I have couple of questions about how to calculate the current contribution and about taxes for contributions above the maximum. I invest in a SIPP.

1. How to calculate maximum contribution

If I top up, say, £10,000 the government adds 20% and this additional contribution is automatically added by my provider so my actual contribution (gross) is £12,000. So far so good. However, I always do a self assessment and claim the additional 20% for high earners. This amount is not added automatically to my pension and it is paid directly into my bank account. This means that I should NOT consider this extra 20% for the maximum contribution calculation. Is this correct?

2. Taxes above maximum contribution

It is clear that I do not receive any tax relief on the amount above the maximum (unless I carry forward of course), but I read everywhere that you pay taxes if you contribute more than the maximum allowed. This confuses me a bit. Does this mean that I actually pay extra taxes or that simply I do not receive any tax relief and that extra amount is taxed as normal income. In my case this has already been taxed by my employer.

Thanks!

NottinghamKnight

1, You report £12k as a contribution on your self assessment form and receive a refund of £2k if you pay sufficient higher rate tax, so you get the money back but the gross pension contribution stays the same. 
2. You are limited to tax relief on your total income for that year, if I understand the question correctly. So you wouldn't get any tax relief but pension companies don't like these payments and you could be penalised if you are considered to be trying to fiddle the system.

AlanP_2

Just to add for Point 1 - You contribute £10k, provider adds £2.5K so gross contribution is £12.5K not £12K.

ruggiero

AlanP_2 said:

Just to add for Point 1 - You contribute £10k, provider adds £2.5K so gross contribution is £12.5K not £12K.

Isn't that 25%?

Sorry, cannot post links yet, but I double checked on the which website calculator?

ruggiero

NottinghamKnight said:

1, You report £12k as a contribution on your self assessment form and receive a refund of £2k if you pay sufficient higher rate tax, so you get the money back but the gross pension contribution stays the same. 
2. You are limited to tax relief on your total income for that year, if I understand the question correctly. So you wouldn't get any tax relief but pension companies don't like these payments and you could be penalised if you are considered to be trying to fiddle the system.

1. OK. I can then just check on my provider website and use the current contribution value they provide. I was worried that I had to guess the gross after the self assessment.

2. My total income is higher than £40,000 so my understand is that this is the maximum amount and not my salaries. I am not trying to trick the system :-:smile:, just trying to do everything correctly and maximise my tax relief.

Dazed_and_C0nfused

ruggiero said:

AlanP_2 said:

Just to add for Point 1 - You contribute £10k, provider adds £2.5K so gross contribution is £12.5K not £12K.

Isn't that 25%?

Sorry, cannot post links yet, but I double checked on the which website calculator?

When it's a "relief at source" contribution to a personal pension or SIPP the pension provider adds 25%.

So say you pay over £10k, they add £2.5k to give you a fund of £12.5k.

Tax relief is 20% (£12.5k x 20% = £2.5k).

And there is no automatic extra 20% via Self Assessment.  The higher rate relief depends on how much higher rate tax has been paid.

ruggiero

Dazed_and_C0nfused said:

ruggiero said:

AlanP_2 said:

Just to add for Point 1 - You contribute £10k, provider adds £2.5K so gross contribution is £12.5K not £12K.

Isn't that 25%?

Sorry, cannot post links yet, but I double checked on the which website calculator?

When it's a "relief at source" contribution to a personal pension or SIPP the pension provider adds 25%.

So say you pay over £10k, they add £2.5k to give you a fund of £12.5k.

Tax relief is 20% (£12.5k x 20% = £2.5k).

And there is no automatic extra 20% via Self Assessment.  The higher rate relief depends on how much higher rate tax has been paid.

Thanks for the clarification. I have master in engineering, I am comfortable with calculus, but when it comes to taxes my brain just doesn't work in the same way :-)

zagfles

Talk of 25% is confusing. It's easier to think in terms of gross amounts. RAS tax relief is 20% on the gross contribution. So if you want £10k to end up in the pension, you pay in £8k net, tax relief of £2k gets added, so £10k is your gross contribution.You may then be able to claim an additional £2k if you're a higher rate taxpayer, but that goes to you not the pension, your gross contribution is still £10k.

Re "My total income is higher than £40,000 so my understand is that this is the maximum amount and not my salaries."

That is rubbish. It's a myth. Or rather a very vague approximation. There is an annual allowance of £40k for most people (exceptions for very high earners or those who've flexiibly accessed their pension) but there is carry forwards, so provided you were in a pension scheme, and didn't contribute £40k+ in previous 3 years, you're unlikely to be limited to £40k. You can use a calculator like https://www.hl.co.uk/pensions/contributions/carry-forward-rule/annual-allowance-calculator Note that you have to include employer contributions for DC (it's more complicated for DB). If you exceed the AA after carry forwards then you need to declare it on self assessment and you're taxed on the excess (effectively removing your tax relief).

In addition there's a limit on tax relief on personal contributions of 100% of your earnings. This is a separate limit nothing to do with the AA, no carry forwards, employer conts are not counted. If you exceed this you need to tell your provider, you can reclaim the excess contributions if you do it by accident.

michaels

NottinghamKnight said:

1, You report £12k as a contribution on your self assessment form and receive a refund of £2k if you pay sufficient higher rate tax, so you get the money back but the gross pension contribution stays the same. 
2. You are limited to tax relief on your total income for that year, if I understand the question correctly. So you wouldn't get any tax relief but pension companies don't like these payments and you could be penalised if you are considered to be trying to fiddle the system.

It is not fiddling the system to contribute more than the annual allowance it is just not eligible for any beneficial tax treatment and will probably be taxable of withdrawal so is probably a worse investment decision than putting the equivalent amount in an isa.