Pension contribution tax limit

NorthernMonkey1

Hello all,
A quick question about pension contribution limits. I have overpaid my pension a little this year in error 
In FY18/19 I paid 33k into my pension
In FY19/20 I paid 35k into my pension
So far this tax year, I have paid 41k into my pension.
Am I correct in thinking, that the 40k max per year is averaged over the previous 3 years, so as long as I pay less than 120k over a 3 year period all is OK, So i can pay up to an additional 11k (52k in total) for this year and stay within the limit?

Dazed_and_C0nfused

Roughly how much will your pensionable earnings be in this tax year?

NorthernMonkey1

Pre-pension, about £120k. Ive been putting so much into my pension to avoid taxable earnings of >100k

Dazed_and_C0nfused

So earnings won't be an issue.  This is a decent guide to carry forward.  I've not heard it be called averaging before though.

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/annual-allowance-carry-forward/

Don't forget if you are contributing to a relief at source scheme such as a personal pension or SIPP then the contributions don't reduce your taxable income.

They do reduce your adjusted net income, which is used to establish your Personal Allowance, and they also increases your basic rate tax band, meaning you can pay more tax at 20% and less at 40%.

Net pay contributions do reduce your taxable income.

jamesd

NorthernMonkey1 said:

In FY18/19 I paid 33k into my pension
In FY19/20 I paid 35k into my pension
So far this tax year, I have paid 41k into my pension.
Am I correct in thinking, that the 40k max per year is averaged over the previous 3 years

What about 2017/18, the oldest of the three previous years? It's not average of three years. It's current plus unused from the previous three years.

For 2020/21 you're allowed 40k + unknown [2017/18] + 7k [2018/19] + 5k [2019/20] = 52k + 2017/18 unused. You have at least 11k gross more that you can use this year and should probably try to use the 2017/18 unused before you lose it.

Salary sacrifice is done as employer gross contributions. Counts towards the annual allowance and reduces taxable pay. They don't count towards the separate no more than (after sacrifice) gross pay limit for personal contributions.

You can increase the NI benefit by concentrating sacrifice into as few months as possible so as much as possible saves you 12% instead of 2% employee NI. NI is calculated for individual pay periods, not annually.

Roughly:

Pre-sacrifice 10k/month gross pay and 521.63 NI. Annual 6,259.52.

Even 40k sacrifice 6,666.66/month gross pay and 454.96 NI. Annual 5,459.52.

Concentrated sacrifice. Minimum wage about 1,541 in a 31 day month for 40 hour weeks so max monthly sacrifice 10,000 - 1,541 = 8,459. 4 months of 1,541/month and 89.98 NI total 359.92. 1 month at 40,000 - (4 * 8,459) = 6,164 sacrifice, 3,836 /month pay and 365.28 NI. 7 months at 0k/month gross pay and 521.63 NI total 3,651.41. Add up the NI 359.28 + 365.28 + 3,651.1 = 4,375.97.

So £1,083.55 less NI than even paying.

You can use carry-forward rules to do some years with 4 of 8,459 sacrifice months and some with 5 or 6 so maximise the 12% portion.

NorthernMonkey1

Dazed_and_C0nfused said:

They do reduce your adjusted net income, which is used to establish your Personal Allowance, and they also increases your basic rate tax band, meaning you can pay more tax at 20% and less at 40%.

Net pay contributions do reduce your taxable income.

It is an employer salary sacrifice scheme

NorthernMonkey1

jamesd said:What about 2017/18, the oldest of the three previous years? It's not average of three years. It's current plus unused from the previous three years.

For 2020/21 you're allowed 40k + unknown [2017/18] + 7k [2018/19] + 5k [2019/20] = 52k + 2017/18 unused. You have at least 11k gross more that you can use this year and should probably try to use the 2017/18 unused before you lose it.

Salary sacrifice is done as employer gross contributions. Counts towards the annual allowance and reduces taxable pay. They don't count towards the separate no more than (after sacrifice) gross pay limit for personal contributions.

You can increase the NI benefit by concentrating sacrifice into as few months as possible so as much as possible saves you 12% instead of 2% employee NI. NI is calculated for individual pay periods, not annually.

Huge thanks for this insight.
5k is realistically the most I can pay per month into my pension. Knowing that I can pay £5k into my pension for the 2 remaining pay cycles of is ideal.
Next year, Ill aim to save more consistently throughout the year, however, earlier in the year, there was the possibility of redundancies, so I reduced contributions, to increase my cash available. In these months, I reduced my payment to 10% to get the max employer match of 10% (employer match is calcuated monthly). The opposite turned out to be true, and I ended up with a large bonus, all of which went into my pension. 

jamesd

0% credit card deals or the low year and save then high sacrifice year might help. Or say 5 months at low sacrifice and save then 4 or 5 at high sacrifice spending the savings with 3 or 2 months depending on how the year grows. A little tinkering to get £1,083 more in your pocket seems worthwhile.

NorthernMonkey1

Thank you. My hope is to really dial it back in a couple of years time. My spending is around £1000 a month, and my current pension pot is just over £300k. I'm 41, and I'm planning to find a less well paid and lower stress job, which can cover my expenditure, then leave the pension to grow to 58 (or whenever the earliest I can draw down on it). My current role is safe at the moment, but that may change at short notice, so I'm making hay while the sun shines, and piling as much into the pension as possible. 
I've got about £150k (£110 S&S isa, £10 company shares, £30 cash) saved, so I'm getting close to the point where I can dial it back a little, but trying to be tax efficient in the last stretch.
I'm finding it tricky to work out the point where I have 'enough' in the pension, and getting the balance between Aftertax and pension savings, while also not knowing at what point I might get given the push from work. 

jamesd

Assuming long term UK equity growth of about 5% plus inflation is achieved 300k now would grow to 655k in today's money by an assumed earliest pension access age of 57. Very roughly each 40k in the next few years adds 80k to that so 4.3 years could take you to the lifetime allowance of around a million. That might provide 40k taxable a year for life. With no extra the 655k might provide 26.2k for life.

Assuming a 9k state pension, deducting 90k to pay yourself that for ten  years leaves 565k that might pay 22.6k a year. Add in the state pension or  its substitute 9k takes you to 31k for life.

But that's retiring at 57. Assuming the growth in the 150k is the same but for only 9 years that grows to 232k at age 50. 232 / 8 = 29k/year for 8 years. So with nothing more added you could retire at 51 on 31k taxable equivalent.

It appears that you should read Drawdown: safe withdrawal rates to learn about safe income levels and the limitations of the crude 4% increasing with inflation that I used in this post.

If you have a mortgage I suggest making the term as long as possible to maximise payments after pension accessibility and facilitate more 40k sacrifice plus ISA investing. That way you can get the salary sacrifice gain on more of the capital repayment. For now I suggest maximising the sacrifice as top saving priority because all jobs let you use ISAs yourself but not all offer salary sacrifice. As you wrote, a good making hay time with this pension while you have it. I'd draw on the ISA money to use  all available carry-forward as fast as you can to eliminate the uncertainty about getting salary sacrifice benefit for it all.

Depending on your income needs you might find that a few more years in the current job then retiring is possible.

It's also worth learning about VCTs since they can further greatly reduce your net tax loss on earnings and you have the savings available to use them.

NorthernMonkey1

Thank you for your words. 
i don't have a mortgage. This was paid off fairly aggressively 3 years ago, which in retrospect was probably not a prudent move. 
I work in a tech role, as a specialist in an area which is shrinking, which my company is trying to move away from. 
It's well paid as its critical to the functioning of the business, but the end is looming for earning what I do now. I could re-skill, but I'd be starting from just off the bottom. There are few jobs in my area of expertise that come up now, and none that wouldn't involve a significant commute or moving, which is not something I want to do given personal circumstances.