Bit confused by the income versus contribution rules

SomeMadeUpName

Hello 
Thanks to all those who helped me on my other thread about opening a pension for small contributions. I'm mind made up on that subject now, but do have a tech query on another aspect that will become relevant over time:
Both myself and my wife are non taxpayers at present and have been for a while. I had thought that this meant that pension saving could get no tax benefit so hadn't bothered. BUT then I found out that as a non tax payer we could still pay in £2880 and get £720 of 'tax' added, so that is what we are doing now.
I've since read a couple of comments on threads that have me a little confused, so wondered if someone could answer a couple of worked examples for me.

Say you had waged income of £6000 per annum (below the tax threshold) what could you pay in? If you paid £2880 I know you get £720 on top. What if you paid in £4800 (80% of £6k) would you get £1200 on top? Or would you only get £720 on top? Or would £1920 of your contribution (£4800-£2880) get rejected by the pension in some way?

Say instead you had waged income of £15000 per annum (so now you are paying tax, but only about £500) what could you pay in? What if you paid in £12k (80% of £15k) would you get £3k paid on top? I've definitely just read a post implying you would on another thread on here. 

What if in each of the two scenarios above you had £5k of rental profit on top of the earned income above, how would that change things?

Appreciate it if someone who knows the rules better than I can get busy with the calculator.

ewaste

You can't get tax relief on tax you haven't paid, with the exception of the £2880+£720 = £3600. You can still contribute more than this upto your earnings but as you won't have paid any income tax you will receive no additional relief so why bother 🤷‍♂️

This is at least my understanding of it and happy to be corrected.

Dazed_and_C0nfused

You are getting non earners and non taxpayers mixed up.

If your pensionable earnings are £6,000 and you have made no other pension contributions then you can contribute £6,000.

With a relief at source scheme such as a SIPP or personal pension that would be a payment of £4,800 from you plus 25% from the pension company making a total fund of £6,000.

The fact that you have not paid any income tax is irrelevant in that situation.

Having rental income does not allow you to make any additional contributions as that is not considered pensionable earnings.

dunstonh

Say you had waged income of £6000 per annum (below the tax threshold) what could you pay in?

£6000 pension contribution is there as its 100% of earned income or £3600 whichever is the higher. (subject to annual allowance or MPAA). - waged income is earned income.  Not unearned income.

Say instead you had waged income of £15000 per annum (so now you are paying tax, but only about £500) what could you pay in?

£15,000 would be the pension contribution with £12,000 being the net contribution.

What if in each of the two scenarios above you had £5k of rental profit on top of the earned income above, how would that change things?

rental income is not earned income.  So, it cannot be used as earned income.

AlanP_2

ewaste said:

You can't get tax relief on tax you haven't paid, with the exception of the £2880+£720 = £3600. You can still contribute more than this upto your earnings but as you won't have paid any income tax you will receive no additional relief so why bother 🤷‍♂️

This is at least my understanding of it and happy to be corrected.

Hopefully the 2 posts below yours have provided the correction you asked for 

xylophone

In your previous thread,  you were given a useful link - it is worth a careful read.


https://forums.moneysavingexpert.com/discussion/comment/78117261/#Comment_78117261

SomeMadeUpName

xylophone said:

In your previous thread,  you were given a useful link - it is worth a careful read.


https://forums.moneysavingexpert.com/discussion/comment/78117261/#Comment_78117261

Hi, yes thx, it's all there in that link. Though tbh the explanations in the posts above illustrate it even more clearly.

Still definitely playing catch up with my reading. 

SomeMadeUpName

ewaste said:

You can't get tax relief on tax you haven't paid, with the exception of the £2880+£720 = £3600. You can still contribute more than this upto your earnings but as you won't have paid any income tax you will receive no additional relief so why bother 🤷‍♂️

This is at least my understanding of it and happy to be corrected.

I'ld thought that too. Clearly though we are both wrong. Worth knowing as I plan to put the wife's earned income up to £6k or thereabouts soon (to get her the last two NI years she needs for full state pension, and because at last we can afford it).

SomeMadeUpName

Dazed_and_C0nfused said:

You are getting non earners and non taxpayers mixed up.

If your pensionable earnings are £6,000 and you have made no other pension contributions then you can contribute £6,000.

With a relief at source scheme such as a SIPP or personal pension that would be a payment of £4,800 from you plus 25% from the pension company making a total fund of £6,000.

The fact that you have not paid any income tax is irrelevant in that situation.

Having rental income does not allow you to make any additional contributions as that is not considered pensionable earnings.

Thx, that's just the info I wanted.

TVAS

Please understand the difference between earned income which means you have to work to get the money and unearned income rent from a property. If you are in a wheelchair you would still get rental income so this is deemed to be unearned income because you do not have to work to get it. 

Pension contributions are based on earned income only.

SomeMadeUpName

dunstonh said:

Say you had waged income of £6000 per annum (below the tax threshold) what could you pay in?

£6000 pension contribution is there as its 100% of earned income or £3600 whichever is the higher. (subject to annual allowance or MPAA). - waged income is earned income.  Not unearned income.

Say instead you had waged income of £15000 per annum (so now you are paying tax, but only about £500) what could you pay in?

£15,000 would be the pension contribution with £12,000 being the net contribution.

What if in each of the two scenarios above you had £5k of rental profit on top of the earned income above, how would that change things?

rental income is not earned income.  So, it cannot be used as earned income.

Cheers for the comprehensive answer.

That £15k illustration is great value, Few hundred quid in tax, but thousands back.