Pension Contribution limits

Slider

Hi,
Between my contribution and my employer contributions we put 32k per year into pension.
This used to be taken after tax, but are now taken from before tax earnings.
Question 1. Is the 32k received by the pension fund topped up by the reclaim of additional 20%. I am thinking not, as no tax has been paid on it.....
If Q1 is yes, then 32/0.8 = 40k so I assume I am at limit for tax relief.
If Q1 is no, then I have an additional 8k of contributions that I can make....
If additional contributions, are made in via the company scheme (which has changed to a master trust recently, and performance is poor compared to previous provider), then I guess it is just a simple 8k taken from gross pay before tax.
If I want to make put the 8k into my previous providers scheme, I will be paying from tax paid monies, so am I correct to pay 6.4k, let the provider claim the 20% to make it up to 8k, and then I claim the additional 20% via tax return as I am a 40% tax payer.
Finally. if I do pay additional top up to my provider from tax paid monies, and claim the additional 20% tax relief via self assessment, do I enter 8k or 1.6k in the box (or some other calculation.....)

Thanks

Linton

Q1 - you dont get tax relief if the pension contribution is paid before tax is calculated since you never pay tax on it in the first place. So the answer to Q1 is "No".

 So you can increase your employee contribution before tax by £8K.  Or, if you contribute elsewhere  after tax you are correct.  You actually pay in £6400 and HMRC add £1600 making £8000.

When talking about pension contributions you always use gross figures unless you are explicitly asked for net so it's the £8K you are actually contributing to your pension through your after-tax payment and for which you want the extra HRT relief.

PS you can carry over unused amounts from the £40K limit from the 3 previous tax years if you have the earned income to cover it.

Dazed_and_C0nfused

There is no fixed "extra 20%" with relief at source contributions to a SIPP.

The gross contribution increases the amount of your basic rate tax band meaning more income will be taxed at 20% and less at 40%.

But the actual relief due will depend on your overall tax situation.  For example if you are paying higher rate tax on £2k of your income and contribute £8k (gross) to a relief at source scheme the maximum personal tax saving is likely to be £400, not £1,600.

Could be more if HICBC is involved.

Slider

Dazed_and_C0nfused said:

There is no fixed "extra 20%" with relief at source contributions to a SIPP.

The gross contribution increases the amount of your basic rate tax band meaning more income will be taxed at 20% and less at 40%.

But the actual relief due will depend on your overall tax situation.  For example if you are paying higher rate tax on £2k of your income and contribute £8k (gross) to a relief at source scheme the maximum personal tax saving is likely to be £400, not £1,600.

Could be more if HICBC is involved.

No HICBC. All additional contribution would be from higher taxable income.

Can you clarify what you mean by no fixed extra 20% for SIPP? Are you suggesting any money’s invested via SIPP receive a recovery of basic rate tax.

Dazed_and_C0nfused

The pension company will add the basic rate tax relief.

But is a common misconception that higher rate taxpayers get an extra 20%.

The way higher rate tax relief works is that your basic rate tax band is increased by the amount of the pension contribution which in turn can reduce any higher rate tax payable i.e. paying more 20% tax and less 40% tax.

But if you contribute say £5k (gross) and pay higher rate tax on say £100 of your income the higher rate tax relief is only £20, not £1,000.

jamesd

Is it now being taken by salary sacrifice, which counts as a gross contribution on which the pension scheme adds nothing?

Slider

jamesd said:

Is it now being taken by salary sacrifice, which counts as a gross contribution on which the pension scheme adds nothing?

Not by Salary Sacrifice, but yes taken before tax is paid, so pension scheme adds nothing as no tax has been paid on the contributions

Slider

Dazed_and_C0nfused said:

The way higher rate tax relief works is that your basic rate tax band is increased by the amount of the pension contribution which in turn can reduce any higher rate tax payable i.e. paying more 20% tax and less 40% tax.

Correct, but tangible cost in net pay is 60p per £ if higher tax is payable on all contributions paid from net pay,
20% reclaimed by pension, and 20% from HMRC.
or Alternatively, if taken before tax, it just reduces the amount of income where 40% tax becomes due

Albermarle

Slider said:

Dazed_and_C0nfused said:

The way higher rate tax relief works is that your basic rate tax band is increased by the amount of the pension contribution which in turn can reduce any higher rate tax payable i.e. paying more 20% tax and less 40% tax.

Correct, but tangible cost in net pay is 60p per £ if higher tax is payable on all contributions paid from net pay,
20% reclaimed by pension, and 20% from HMRC.
or Alternatively, if taken before tax, it just reduces the amount of income where 40% tax becomes due

Also if taken before tax , it all ends up in the pension. The other way you get the higher rate relief , either as a refund , or higher take home pay ( if tax code is adjusted ) , so in your pocket.