Sense check - maximum pension contributions

bjorn_toby_wilde

In the run up to the end of the tax year I'm trying to make the most tax efficient use of my pension allowance.  I think I've done the maths correctly but I'd just like someone to sense check it.

The total of employer and employee contributions so far by salary sacrifice is £21,324.  My March pay check should add another £856 so I think that should leave £17,820 headroom to the £40k allowance, which I believe is gross not net.  As a higher rate taxpayer I think that means I can pay in 60% of £17,820 = £10692

Does that look right?  I'm struggling to get through to my pension provider at the moment because of the long phone queues.  Any help gratefully received 

Dazed_and_C0nfused

No, higher rate tax relief isn't counted.

And employees don't usually contribute to a pension when it is salary sacrifice, they are agreeing to a lower salary in return for increased employer contributions.

If £17,820 is correct and you have sufficient earnings to contribute that much gross into a relief at source scheme then you would pay £14,256 with the pension company adding £3,564 basic rate tax relief.

Any higher rate tax relief due is between you and HMRC.

Albermarle

No not quite right .
Even though you are a higher rate taxpayer , when you make the one off contribution this month , the provider will only add basic rate tax relief. So gross £17820 = net £14,256 . You will have to claim the higher rate tax relief back from HMRC and it will  come to you as a tax refund ( of £3564) and not go to the pension.
Some other points to note
As your provider is used to receiving your contributions as an employer payment where no tax relief is added , there is the potential for them treating your one off payment the same way . They should not ( and mine don't) but it could happen so best to contact them .
After you have informed HMRC ( no need for self assessment just for this issue) they will adjust your tax code for 21/22 on the assumption you will make a similar payment next year. So you will get a higher take home pay rather than a refund at the end of the year. If you do not intend to make a similar payment in 21/22 you need to get the code adjusted back again.
If you have not used up your full £40K allowance in the previous three years , you can bring forward unused allowance and add more than £40K . However you have to have sufficient taxable earnings in this tax year to make use of that.
It is better to make more contributions via salary sacrifice due to the NI saving , than adding one off lump sums.

Kynthia

When I claimed higher rate tax relief from HMRC late in the financial year, they sent me the money rather than changed my tax code. If you speak to them they should clarify what method they'll use.

bjorn_toby_wilde

Thanks very much both.  That's very helpful.

Dazed and Confused - (looks like we may have similar musical tastes ) I take your point about the salary sacrifice.  My employer records the salary sacrifice on my virtual payslips and breaks it down as if it's employee and employer contributions.  I guess it amounts to the same thing as I do know exactly how much has gone in.  Thanks for the clarification on the higher rate tax too.

Albemarle - Thank you too - that's a very good point about the National Insurance which I'd missed.  I'll look into increasing my monthly contributions instead next tax year.  Thanks also for the reminder about advising my provider.

bjorn_toby_wilde

Kynthia said:

When I claimed higher rate tax relief from HMRC late in the financial year, they sent me the money rather than changed my tax code. If you speak to them they should clarify what method they'll use.

Thanks Kynthia - again a good tip.

Dazed_and_C0nfused

Kynthia said:

When I claimed higher rate tax relief from HMRC late in the financial year, they sent me the money rather than changed my tax code. If you speak to them they should clarify what method they'll use.

HMRC only ever allow pension tax relief against the tax year the contribution was made in.

If you notify them late in the tax year the contribution was made in (or after the tax year has ended) they will send a calculation for the contribution year including any relief due.

At the same time they will normally update the current year's tax code on the assumption that you will make a similar contribution again. 

That change to your current year tax code is only ever allowing relief provisionally for the current tax year, it is never to allow pension tax relief from an earlier tax year.

bjorn_toby_wilde

Albermarle said:

If you have not used up your full £40K allowance in the previous three years , you can bring forward unused allowance and add more than £40K . However you have to have sufficient taxable earnings in this tax year to make use of that.
It is better to make more contributions via salary sacrifice due to the NI saving , than adding one off lump sums.

So if I wanted to use some of my savings to contribute above that £40k threshold, provided I didn't exceed my gross income, I would be able to do that? I do have unused allowance from previous years. Again, I'm guessing I would have to notify HMRC after the event.

Albermarle

bjorn_toby_wilde said:

Albermarle said:

If you have not used up your full £40K allowance in the previous three years , you can bring forward unused allowance and add more than £40K . However you have to have sufficient taxable earnings in this tax year to make use of that.
It is better to make more contributions via salary sacrifice due to the NI saving , than adding one off lump sums.

So if I wanted to use some of my savings to contribute above that £40k threshold, provided I didn't exceed my gross income, I would be able to do that? I do have unused allowance from previous years. Again, I'm guessing I would have to notify HMRC after the event.

Where the money comes from is irrelevant and you do not have to inform HMRC . ( I have done this and topped up with savings myself) Only that you should keep records of your calculations in case they ever ask to see them . Your pension provider could well warn you if you exceed the £40K allowance but just tell them you have unused allowance from previous years. 

jamesd

You do need to tell HMRC to get any higher rate relief when it's not done by salary sacrifice. Tell them that you made a gross (paid in X 1.25) contribution to a relief at source pension scheme.

You don't need to tell HMRC that you used carry-forward. Their computers will already be keeping track.

bjorn_toby_wilde

Perfect.  Thanks both