Exceeding Annual Allowance with matched contributions

bp1984

All,

After a bit of advice. My company offers a generous Defined Contribution pension and I am now expecting to exceed my Annual Allowance. I also don't have any carry-over from the previous 3 years which I can use this year. They offer a 50% match on any additional contributions I make up to a maximum of 4% and I have been taking advantage of that.

The question I have is whether it makes sense to continue with this and exceed my annual allowance given the 50% match and pay the associated tax? I am in the 45% tax band so will be liable for tax on it at that rate if I take my normal pay instead. I expect to have a pension pot when I retire which will make me liable for basic rate tax. I am in my late 30s.

Another option we have is for me to take my pay as normal rather than paying in over my annual allowance, pay 45% tax on it, and then my wife to pay into her pension and claim back 20% tax relief as part of a self assessment (as she is a basic rate tax payer). She is also expecting to have a pension pot when she retires which will make her liable for basic rate tax. 

I can't figure out the maths of it to see which presents the best outcome financially.

In future we intend to get some formal financial planning advice but given the proximity to the end of the tax year and the fact I only have a couple of days to finalise whether to continue with them or not for the next 2 pay periods, I thought I would seek some advice on here.

Many thanks, Barry 

hugheskevi

Assume you put a gross £100 into pension, at a net cost of £55 (45% tax relief).

Employer matches 50%, so £150 goes into the pension.

This all exceeds Annual Allowance, so a charge of £150 x 45% = £67.50 is levied. Using Scheme Pays to meet the charge, this means £82.50 remains in the pension.

When the pension is taken, 25% is tax free and 75% taxed, so you receive £70.125 (ignoring growth).

So under those assumptions there is a benefit to pension contributions. However, this is subject to some key assumptions, and in particular:

• Tapered Annual Allowance is not an issue
  
• Higher rate tax will not be paid on pension income
  
• Lifetime Allowance will not be breached

If any of these are not true, the result changes.

Perhaps the employer could be persuaded to add an extra 2% to pay instead of paying it as pension?

bp1984 said:

and then my wife to pay into her pension and claim back 20% tax relief as part of a self assessment (as she is a basic rate tax payer).

Wouldn't the 20% tax relief be added automatically under Relief-at-Source or Net Pay arrangement? Or does she have a less common pension arrangement?

Putting £100 gross into wife pension comes at a net cost of £80 (20% relief). When pension is taken, £85 is received after basic rate tax and PCLS.

So under assumptions as stated, your pension sees £55 turned into £70.125. Your wife's pension sees £80 turned into £85. However, assumptions are critical and result is very sensitive to any variance in assumptions.

Dazed_and_C0nfused

Another option we have is for me to take my pay as normal rather than paying in over my annual allowance, pay 45% tax on it, and then my wife to pay into her pension and claim back 20% tax relief as part of a self assessment (as she is a basic rate tax payer). She is also expecting to have a pension pot when she retires which will make her liable for basic rate tax. 

That is quite unusual, are you referring to a lump sum contribution to a public sector scheme?

ratechaser

This may be slightly OT, but if you don't mind me asking, does your scheme not apply a notional earnings cap on which limits the actual value of percentage contributions? 

Reason I ask is twofold - firstly I thought that although HMRC stopped publishing earning cap numbers in 2011, UK occupational pension schemes still had to apply their own calculations (for my scheme, the cap is 150k this tax year and that is the maximum salary they will base contribution percentages on).

And secondly, if that cap does exist for you then I have to say, that is a pretty darn generous pension scheme you are in!

Edit: I'd forgotten about tapering, so I guess that may be playing a part here and it's not quite as generous as I first thought...