Technical question of lump sum pension contribution

IamWood

I'm planning to make a lump sum pension contribution soon to top up my pension account. The payment would be approximately £70,000, for the allowance of this tax year and the year before.

A couple of technical question please:

1) As a 40% taxpayer, I am aware that I can claim extra 20% tax relief for £40,000 during the tax year 2020. Can I apply for tax relief for the remainder of £30,000 for the tax year 2019 (hopefully filing a late tax return)?

2) To minimize the timing risk, ideally I would like to transfer the fund to a cash pension fund and then gradually transfer the money to other pension funds over the next 12 months. How should I do it? Are there any known SIPP platforms that offer this service if I prefer not to put the money into my work pension provider?

Thank you!

Dazed_and_C0nfused

1).  You can only ever get tax relief for the tax year the contribution is made in.  Also, you don't get an "extra 20%".  The gross contribution increases the amount of your basic rate tax band.  Which in turn reduces the amount of higher rate tax payable.  The actual personal tax saving depends on how much higher rate tax you would otherwise be paying.
If you were only paying higher rate tax on say £20,000 then the personal tax saving would normally only be £4,000 (£20,000 x 20% rather than 40%).
It can be more if you are subject to the High Income Child Benefit Charge as the gross contribution reduces your adjusted net income.  Same if adjusted net income exceeds £100k.

IamWood

Thank you @Dazed_and_confused.
for 1). Do I get the basic 20% tax relief from my pension provider or nothing at all?

I 'opt-out' Child benefit many years ago. I think I've missed a lot with the ignorance of my personal finance. Will be maximizing out my work pension sacrifice from the coming month, thanks to this forum.

Linton

Is your income greater than £70K?  In a tax year you cant make gross contributions exceeding your annual earned income.

1) Even if you are using a previous year's annual allowance the tax refund is always based on the current tax year.  You cant get tax relief from a previous tax year. 

How much tax refund you get and how it is paid depends on what sort of pension you will be contributing into.  Is it an employers pension or a personal pension?  If it's an employers' pension your will need to check with them how they are processing it with regards to tax.

If you are paying into a personal pension with taxed money HMRC will add the 20% basic rate tax relief to your contribution.  So if you pay in £70K net they will increase it to £87.5K (£87.5K X 80%=£70K).  So if you only want £70K to go into your pension you actually pay in £56K with the missing £14K coming from basic rate tax relief.

How much higher rate tax relief you get depends on how much of the gross contribution is covered by your higher rate band.  Clearly you dont get higher rate relief for any part of the contribution paid from money taxed at the basic rate.  Probably easiest to wait until the tax year end to claim any higher rate tax relief due - this is paid to you rather than to your pension.

I will leave others to explain what happens if you are an additional rate tax payer,

2) If you are paying the money into a SIPP you will be able to keep it as cash and use the money to buy funds as and when you wish.  If you are paying into your employers pension then what you can do depends on the nature of the scheme.

IamWood

Thank you very much @Linton, for your detailed explanation.
My salary in 2020 was £75000.

Linton

IamWood said:

Thank you very much @Linton, for your detailed explanation.
My salary in 2020 was £75000.

In which case, assuming you are paying into a SIPP you will actually pay in £56K.  You will then receive £14K from HMRC which includes relief for money on which you werent taxed.  If on the other hand the money is being taken as a pre tax pension contribution from your salary you will get less total relief.

Dont forget the £40K limit is a total for all pension contributions in he tax year, including those made by your employer. 

Dazed_and_C0nfused

My salary in 2020 was £75000.

Don't know what you mean by that?  Are you referring to the 2019:20 tax year?

It is your income in the 2020:21 tax year which is relevant as far as tax relief on a contribution being made in the current tax year is concerned.

Albermarle

In future  please do not post the identical same question in another forum ....

IamWood

Dazed_and_C0nfused said:

My salary in 2020 was £75000.

Don't know what you mean by that?  Are you referring to the 2019:20 tax year?

I meant the tax year 2020-2021, similar in 2019-2020.

Thanks a lot!