Annual allowance limit uncertainty

rundmc-k

So I have finally bitten the bullet and opened a Vanguard SIPP and invested a preliminary 10k in their global all cap index fund.
I am in the higher tax band by about 21k this year, so am considering investing more.

My queries are:
a) If I want to fully reduce my higher rate tax when I fill self assessment, would I need to pay 21k total into the SIPP, or 80% of 21k (about 17k).

b) I also pay into an NHS pension and I am not certain of my NHS Pension Input Amount for this year but I am assuming it will be around 23k (a slight increase on last year) so either of the above options could take me above my Annual Allowance of 40k, but I haven't been close to it in my previous 3 years. Is it simple to use those last 3 years when I fill out self-assessment later this year, as I have never done it before.

masonic

When you contribute to a SIPP you will receive BR tax relief and claim HR tax relief through your tax return. Are you saying that your income net of your NHS pension contributions is still £21k above the higher rate threshold? If so then you'd need to make a total of £21k in SIPP contributions to receive tax relief equal to your higher rate tax liability. You don't need to report to HMRC when you carry forward unused pension allowance from previous tax years, see https://www.gov.uk/guidance/check-if-you-have-unused-annual-allowances-on-your-pension-savings#carry-forward-your-unused-annual-allowance

rundmc-k

Yes, after my NHS pension contributions have been taken, I am 21k above the higher rate threshold.
So it's 21k I would need to pay into the SIPP in total then. This would definitely take me over the Annual Allowance limit for this year. Are you saying I don't need to notify HMRC or my NHS employer of that fact then, as long as it can ultimately be shown that I had previous unused allowance?

masonic

rundmc-k said:

Yes, after my NHS pension contributions have been taken, I am 21k above the higher rate threshold.
So it's 21k I would need to pay into the SIPP in total then. This would definitely take me over the Annual Allowance limit for this year. Are you saying I don't need to notify HMRC or my NHS employer of that fact then, as long as it can ultimately be shown that I had previous unused allowance?

The carry forward allowance applies to pension schemes you were already a member of when you received the qualifying earnings from prior tax years. So it would be the NHS scheme that would effectively use the carry forward allowance. It may be worth raising this with them.

jscol

b) I also pay into an NHS pension and I am not certain of my NHS Pension Input Amount for this year but I am assuming it will be around 23k (a slight increase on last year)

I think this is a very difficult assumption to make. I too have an NHS pension. My pension input amount has varied greatly. It depends on numerous factors and I don't think it's easy to predict. 

toothdoctor

Im in exactly the same boat. You don't know what the growth in your NHS pension is until you get you annual allowance pension statement in the October/November of the next tax year, so it can be a bit of guess work of how much you can contribute to a SIPP without breaching AA. To get 21k into your SIPP you would pay 16,800 into the SIPP and HMRC would add 4,200.

rundmc-k

masonic said:

The carry forward allowance applies to pension schemes you were already a member of when you received the qualifying earnings from prior tax years. So it would be the NHS scheme that would effectively use the carry forward allowance. It may be worth raising this with them.

Ah, ok, that confuses me a bit then. So because the unused allowance was during years where I only paid into the NHS scheme, it would have to be utilised through that scheme? I guess I could contact them about that but clearly I've left it too late to come to any conclusions this tax year. Even if I haven't raised it with them yet, if I do go over my annual allowance through paying into the SIPP, but by less than the total unused allowance of the last 3 years, I'm not going to run into a situation where I definitely have to pay a tax charge am I? 

rundmc-k

jscol said:

I think this is a very difficult assumption to make. I too have an NHS pension. My pension input amount has varied greatly. It depends on numerous factors and I don't think it's easy to predict. 

Yes I agree, I don't have a clue what the pension input amount is going to be, but I do know what it was for the last 5 years and there hasn't been a vast difference, so I'm presuming it won't a vast difference this year. When you only get a statement months after the tax year ends showing your PIA, I don't know how you're supposed to be able to work out how much annual allowance you still have to use before the end of the tax year?

rundmc-k

toothdoctor said:

Im in exactly the same boat. You don't know what the growth in your NHS pension is until you get you annual allowance pension statement in the October/November of the next tax year, so it can be a bit of guess work of how much you can contribute to a SIPP without breaching AA. To get 21k into your SIPP you would pay 16,800 into the SIPP and HMRC would add 4,200.

Yes, it is guesswork really. I don't particularly want to breach AA if it's going to potentially get me into me into a quagmire with the HSC trying to get it sorted out.
I understand about the 16,800 making 21k in the SIPP, I just wasn't sure if investing 16,800 in the SIPP would take me completely out of higher rate tax if I'm 21k above the threshold, or if I'd have to invest the 21k, which would then become 26.5k

Dazed_and_C0nfused

rundmc-k said:

toothdoctor said:

Im in exactly the same boat. You don't know what the growth in your NHS pension is until you get you annual allowance pension statement in the October/November of the next tax year, so it can be a bit of guess work of how much you can contribute to a SIPP without breaching AA. To get 21k into your SIPP you would pay 16,800 into the SIPP and HMRC would add 4,200.

Yes, it is guesswork really. I don't particularly want to breach AA if it's going to potentially get me into me into a quagmire with the HSC trying to get it sorted out.
I understand about the 16,800 making 21k in the SIPP, I just wasn't sure if investing 16,800 in the SIPP would take me completely out of higher rate tax if I'm 21k above the threshold, or if I'd have to invest the 21k, which would then become 26.5k

Contributing £21k gross in the current tax year will increase your basic rate tax band from £37,500 to £58,500.

masonic

rundmc-k said:

masonic said:

The carry forward allowance applies to pension schemes you were already a member of when you received the qualifying earnings from prior tax years. So it would be the NHS scheme that would effectively use the carry forward allowance. It may be worth raising this with them.

Ah, ok, that confuses me a bit then. So because the unused allowance was during years where I only paid into the NHS scheme, it would have to be utilised through that scheme? I guess I could contact them about that but clearly I've left it too late to come to any conclusions this tax year. Even if I haven't raised it with them yet, if I do go over my annual allowance through paying into the SIPP, but by less than the total unused allowance of the last 3 years, I'm not going to run into a situation where I definitely have to pay a tax charge am I? 

One of the requirements of the carry forward allowance is that you must be a member of a pension scheme to accrue it. In other words you must have had earnings that could have been paid into a pension but weren't, and a pension that could have received them but didn't. This is the case in your situation if you treat your newly opened SIPP as having received the first £21k of pension contributions, you would then have an additional £19k + carry forward allowance to use against your NHS pension contributions. It sounds like you have enough carry forward allowance to cover your NHS pension contributions even if they are double what they were last year. HMRC will know what your total earnings were in previous tax years and how much was paid into your pension, so it should be clear to them that additional contributions qualify for tax relief. The only reason to contact your NHS scheme administrator is to reassure yourself they are aware you've been accruing the carry forward allowance.