Do I understand the pension annual allowance correctly?

cgyan

Hi, I am trying to work out how much I can contribute to my SIPP this tax year without exceeding the annual allowance and wanted to confirm that I understand the rules correctly.

For context I have a workplace pension (defined contribution) that my employer and I pay into via salary sacrifice and I also have a SIPP that I make monthly contributions to via direct debit (from net pay obviously).

I understand that the annual allowance is either 100% of your gross salary or £40,000 whichever is lowest but I don't quite understand exactly what the allowance is comprised of. So using an example of a £25,000 gross salary and lets say the workplace pension receives £5,000 in a tax year made up of pre tax contributions from the employer and myself. If I understand correctly I think I could contribute to my SIPP a maximum of £16,000 from my net pay which becomes £20,000 once tax relief is added for a total of £25,000 gross contributions across each pension and thereby not exceeding the 100% of the gross salary.

Have I understood the allowance correctly? Thanks 

Dazed_and_C0nfused

One thing to remember is salary sacrifice means you aren't contributing.

You are agreeing to a lower salary in return for your employer paying more into the pension.

That is why there is no pension tax relief with salary sacrifice, they are employer contributions.

https://www.pruadviser.co.uk/knowledge-literature/oracle-plus/annual-allowance/

AW2011S

Yes you are right but you could also pay more than 16k net in if you have not used your full annual allowances for the last 3 years, as unused relief can then be added to the 25k earnings limit in your eg. If you earn over 200k, you need to check that your annual allowance is not tapered for the current or previous 3 years (the income limit for testing this before 6.4.20 was 110k not 200k). 
https://www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance

zagfles

cgyan said:

Hi, I am trying to work out how much I can contribute to my SIPP this tax year without exceeding the annual allowance and wanted to confirm that I understand the rules correctly.

For context I have a workplace pension (defined contribution) that my employer and I pay into via salary sacrifice and I also have a SIPP that I make monthly contributions to via direct debit (from net pay obviously).

I understand that the annual allowance is either 100% of your gross salary or £40,000 whichever is lowest but I don't quite understand exactly what the allowance is comprised of. So using an example of a £25,000 gross salary and lets say the workplace pension receives £5,000 in a tax year made up of pre tax contributions from the employer and myself. If I understand correctly I think I could contribute to my SIPP a maximum of £16,000 from my net pay which becomes £20,000 once tax relief is added for a total of £25,000 gross contributions across each pension and thereby not exceeding the 100% of the gross salary.

Have I understood the allowance correctly? Thanks 

No you haven't. The bolded bit above is rubbish, although it's rubbish that seems to appear in a lot of places, even here sometimes. The annual allowance is £40k for everyone, except very high earners and those who've already flexibly accessed a pension.

Separately, there's tax relief limit which is 100% of your "relavant earnings" (employment income and a few similar types of income). That's gross including the tax relief.

So on the sort of numbers you've quoted, you can contribute 100% of your taxable income to the SIPP gross, ie 80% net. Taxable income being income after the sal sac is taken off obviously. So if the £25k you quoted is after the sal sac, you can pay in £20k net to a SIPP and it'll be grossed up to £25k.

See the Pru link for details, also previous threads here, it's discussed here regularly.

cgyan

Dazed_and_C0nfused said:

One thing to remember is salary sacrifice means you aren't contributing.
You are agreeing to a lower salary in return for your employer paying more into the pension.
That is why there is no pension tax relief with salary sacrifice, they are employer contributions.

Yes, I see that now, I hadn't thought about it in those terms. Thank you for the pru link too, it really helped explain how the allowance works.

AW2011S said:

Yes you are right but you could also pay more than 16k net in if you have not used your full annual allowances for the last 3 years, as unused relief can then be added to the 25k earnings limit in your eg. If you earn over 200k, you need to check that your annual allowance is not tapered for the current or previous 3 years (the income limit for testing this before 6.4.20 was 110k not 200k). 

Thanks for that information and I'll look into it.

zagfles said:

No you haven't. The bolded bit above is rubbish, although it's rubbish that seems to appear in a lot of places, even here sometimes. The annual allowance is £40k for everyone, except very high earners and those who've already flexibly accessed a pension.

Separately, there's tax relief limit which is 100% of your "relavant earnings" (employment income and a few similar types of income). That's gross including the tax relief.

So on the sort of numbers you've quoted, you can contribute 100% of your taxable income to the SIPP gross, ie 80% net. Taxable income being income after the sal sac is taken off obviously. So if the £25k you quoted is after the sal sac, you can pay in £20k net to a SIPP and it'll be grossed up to £25k.

See the Pru link for details, also previous threads here, it's discussed here regularly.

Really appreciate that response, zagfles, as it provided the 'aha' moment for me. I've been tying together the concepts of annual allowance and tax relief limits essentially thinking they were the same thing instead of considering them separately. No wonder that in all my research it just wasn't clicking together.

So based on the example above, in order not to exceed the tax relief limit

• net SIPP contributions + tax relief <= 100% gross salary (post sal sac)

And in order not to incur the annual allowance charge

• all contributions across all pensions (employer, net SIPP + tax relief) <= £40,000

zagfles

AW2011S said:

Yes you are right but you could also pay more than 16k net in if you have not used your full annual allowances for the last 3 years, as unused relief can then be added to the 25k earnings limit in your eg. If you earn over 200k, you need to check that your annual allowance is not tapered for the current or previous 3 years (the income limit for testing this before 6.4.20 was 110k not 200k). 
https://www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance

Bolded bit is wrong. Carry forwards applies the annual allowance, not the earnings limit.

zagfles

cgyan said:

zagfles said:

No you haven't. The bolded bit above is rubbish, although it's rubbish that seems to appear in a lot of places, even here sometimes. The annual allowance is £40k for everyone, except very high earners and those who've already flexibly accessed a pension.

Separately, there's tax relief limit which is 100% of your "relavant earnings" (employment income and a few similar types of income). That's gross including the tax relief.

So on the sort of numbers you've quoted, you can contribute 100% of your taxable income to the SIPP gross, ie 80% net. Taxable income being income after the sal sac is taken off obviously. So if the £25k you quoted is after the sal sac, you can pay in £20k net to a SIPP and it'll be grossed up to £25k.

See the Pru link for details, also previous threads here, it's discussed here regularly.

Really appreciate that response, zagfles, as it provided the 'aha' moment for me. I've been tying together the concepts of annual allowance and tax relief limits essentially thinking they were the same thing instead of considering them separately. No wonder that in all my research it just wasn't clicking together.

So based on the example above, in order not to exceed the tax relief limit

• net SIPP contributions + tax relief <= 100% gross salary (post sal sac)

And in order not to incur the annual allowance charge

• all contributions across all pensions (employer, net SIPP + tax relief) <= £40,000

Yes that's right.

Also as above don't get confused by carry forwards - it only applies to the annual allowance, not the tax relief limit. So on the sort of income you mention it doesn't help, as you could have bags of annual allowance spare with carry forwards, but you are still constrained by the tax relief limit ie this year's earnings.

Croeso69

zagfles said:

cgyan said:

zagfles said:

No you haven't. The bolded bit above is rubbish, although it's rubbish that seems to appear in a lot of places, even here sometimes. The annual allowance is £40k for everyone, except very high earners and those who've already flexibly accessed a pension.

Separately, there's tax relief limit which is 100% of your "relavant earnings" (employment income and a few similar types of income). That's gross including the tax relief.

So on the sort of numbers you've quoted, you can contribute 100% of your taxable income to the SIPP gross, ie 80% net. Taxable income being income after the sal sac is taken off obviously. So if the £25k you quoted is after the sal sac, you can pay in £20k net to a SIPP and it'll be grossed up to £25k.

See the Pru link for details, also previous threads here, it's discussed here regularly.

Really appreciate that response, zagfles, as it provided the 'aha' moment for me. I've been tying together the concepts of annual allowance and tax relief limits essentially thinking they were the same thing instead of considering them separately. No wonder that in all my research it just wasn't clicking together.

So based on the example above, in order not to exceed the tax relief limit

• net SIPP contributions + tax relief <= 100% gross salary (post sal sac)

And in order not to incur the annual allowance charge

• all contributions across all pensions (employer, net SIPP + tax relief) <= £40,000

Yes that's right.

Also as above don't get confused by carry forwards - it only applies to the annual allowance, not the tax relief limit. So on the sort of income you mention it doesn't help, as you could have bags of annual allowance spare with carry forwards, but you are still constrained by the tax relief limit ie this year's earnings.

If the pension is a DB then the above is incorrect, well the second comparison is, i am not sure about the first. Need to consider increase in the accrued DB benefits in excess of CPI, multiplied by 16 I think - instead of just the actual employee and employer contributions to the said DB.

zagfles

Croeso69 said:

zagfles said:

cgyan said:

zagfles said:

No you haven't. The bolded bit above is rubbish, although it's rubbish that seems to appear in a lot of places, even here sometimes. The annual allowance is £40k for everyone, except very high earners and those who've already flexibly accessed a pension.

Separately, there's tax relief limit which is 100% of your "relavant earnings" (employment income and a few similar types of income). That's gross including the tax relief.

So on the sort of numbers you've quoted, you can contribute 100% of your taxable income to the SIPP gross, ie 80% net. Taxable income being income after the sal sac is taken off obviously. So if the £25k you quoted is after the sal sac, you can pay in £20k net to a SIPP and it'll be grossed up to £25k.

See the Pru link for details, also previous threads here, it's discussed here regularly.

Really appreciate that response, zagfles, as it provided the 'aha' moment for me. I've been tying together the concepts of annual allowance and tax relief limits essentially thinking they were the same thing instead of considering them separately. No wonder that in all my research it just wasn't clicking together.

So based on the example above, in order not to exceed the tax relief limit

• net SIPP contributions + tax relief <= 100% gross salary (post sal sac)

And in order not to incur the annual allowance charge

• all contributions across all pensions (employer, net SIPP + tax relief) <= £40,000

Yes that's right.

Also as above don't get confused by carry forwards - it only applies to the annual allowance, not the tax relief limit. So on the sort of income you mention it doesn't help, as you could have bags of annual allowance spare with carry forwards, but you are still constrained by the tax relief limit ie this year's earnings.

If the pension is a DB then the above is incorrect, well the second comparison is, i am not sure about the first. Need to consider increase in the accrued DB benefits in excess of CPI, multiplied by 16 I think - instead of just the actual employee and employer contributions to the said DB.

Yes. But the OP's pension is DC as they made clear.

The first (tax relief limit) is the same whether DB or DC.

Croeso69

zagfles said:

Croeso69 said:

zagfles said:

cgyan said:

zagfles said:

No you haven't. The bolded bit above is rubbish, although it's rubbish that seems to appear in a lot of places, even here sometimes. The annual allowance is £40k for everyone, except very high earners and those who've already flexibly accessed a pension.

Separately, there's tax relief limit which is 100% of your "relavant earnings" (employment income and a few similar types of income). That's gross including the tax relief.

So on the sort of numbers you've quoted, you can contribute 100% of your taxable income to the SIPP gross, ie 80% net. Taxable income being income after the sal sac is taken off obviously. So if the £25k you quoted is after the sal sac, you can pay in £20k net to a SIPP and it'll be grossed up to £25k.

See the Pru link for details, also previous threads here, it's discussed here regularly.

Really appreciate that response, zagfles, as it provided the 'aha' moment for me. I've been tying together the concepts of annual allowance and tax relief limits essentially thinking they were the same thing instead of considering them separately. No wonder that in all my research it just wasn't clicking together.

So based on the example above, in order not to exceed the tax relief limit

• net SIPP contributions + tax relief <= 100% gross salary (post sal sac)

And in order not to incur the annual allowance charge

• all contributions across all pensions (employer, net SIPP + tax relief) <= £40,000

Yes that's right.

Also as above don't get confused by carry forwards - it only applies to the annual allowance, not the tax relief limit. So on the sort of income you mention it doesn't help, as you could have bags of annual allowance spare with carry forwards, but you are still constrained by the tax relief limit ie this year's earnings.

If the pension is a DB then the above is incorrect, well the second comparison is, i am not sure about the first. Need to consider increase in the accrued DB benefits in excess of CPI, multiplied by 16 I think - instead of just the actual employee and employer contributions to the said DB.

Yes. But the OP's pension is DC as they made clear.

The first (tax relief limit) is the same whether DB or DC.

Just thought it worth clarifying the DB difference as that also crops up frequently. Really need this to be a 'sticky' don't we?

michaels

Also worth noting that any employee contributions to the employer scheme are sal sac and the £25k income is after sal sac has been deducted.  If the employee contributions to the work pension were not sal sac then they would count in both income part of the calc and also contributions from income.