Help with understanding £40K annual allowance please?

Number75

Hello!

I’m struggling to get my head around the £40K annual allowance, and would be really grateful for any advice on calculating it! I’ve done a lot of reading on PAS and .gov but not feeling confident at all - and if my interpretation is correct, I’m too close to the £40K not to get this right!

I’ve put all the numbers below - as well as making it (hopefully!) clearer, I thought it would make it easier to other curious people looking on the thread to understand...

Thank you to anyone who takes the time to read it, even if they can’t help 🙂

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Firstly, my private DC pension. 

I pay in £1500 per month, and Aviva adds 25% (£325) = £22,500

However, as I pay 40% tax (gross salary £70K) a few years ago I had HRMC change my tax code to reflect paying in £18,000 net per tax year. So I also get 25% relief, but it doesn’t go into the pension fund.

Question 1: presumably I add that 25% so my pension contribution (for calculating annual allowance usage) is £22,500 + £4,500 = £27,000?

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Next comes my work pension, which is part DB and part DC. 

The DB is up to a cap of £47,000. The accrual rate is 1/70th, and I’ve worked there 20 years.

I used the advice from PAS website:

Opening value is 20/70 x £47K, x1.03 (3% CPI assumption, though I know I’d need actual CPI) x16.

20/70 x £47K, then x1.03, then x16 = £221,303

Closing value is 21/70 x £47.5K (there’s an annual increase to cap), x16 = £228,000

Difference = £6700

Question 2: any howlers in my understanding there?!

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The DC part is 8% me, 12% employer.

Salary of £70K minus cap of £47.5K = £22.5K.

20% x £22.5K = £4500

Question 3: Pension scheme is salary sacrifice, so I think no tax relief to allow for when calculating usage of annual allowance?

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I think this brings me to:

Personal DC scheme: £27,000

Work DB scheme: £6,700

Work DC scheme: £4,500

= £38,200

So, getting very close to my £40K.

I wanted to increase my payments into my Personal DC scheme, but looks like I haven’t got scope - but I don’t want to make a mistake with the rules and lose out! 

I haven’t used carry forward, so I think I could do that. But if my salary is £70K and 40% band starts at approx £50K, then I don’t think there’s much scope there. I’m not convinced about 25% relief going in, as I’ll certainly be paying tax when I drawdown. That’s a whole other bit of research though and I’ve asked enough questions for today 🙂

Really grateful for any insight... even if you only know one part of it! 

Dazed_and_C0nfused

Firstly, my private DC pension. I pay in £1500 per month, and Aviva adds 25% (£325) = £22,500

However, as I pay 40% tax (gross salary £70K) a few years ago I had HRMC change my tax code to reflect paying in £18,000 net per tax year. So I also get 25% relief, but it doesn’t go into the pension fund.

Question 1: presumably I add that 25% so my pension contribution (for calculating annual allowance usage) is £22,500 + £4,500 = £27,000?

You've gone a bit awry with your figures there.

If you contribute £1,500/month Aviva will add 25% however that is £375, not £325 (still £22,500 gross).

You may well get an additional 20% (could be much more depending on your tax situation or less depending on any net pay contributions in your DB scheme) higher rate tax relief but that is not counted as part of the annual allowance, just the "relief at source" element is relevant.

Dazed_and_C0nfused

Question 3: Pension scheme is salary sacrifice, so I think no tax relief to allow for when calculating usage of annual allowance?

There is no pension tax relief with salary sacrifice as you aren't making the contribution, it is an employer contribution.  Which they make as a consequence of you reducing your salary.

Number75

Thanks Dazed_ and, that’s what I thought but looking to get it all confirmed - appreciate your time to read a long post and reply! Thank you.

Number75

And well spotted on the £325, though glad I put the right total in 

It’s very good news that only the relief at source counts, as that definitely gives to scope to up my personal pension contributions!

Thank you again! 

Username03725

Can I ask a further question related to this pls?

I pay in ~£1016 per month, made up of my base contribution, employer's matched contribution up to max 5%, plus an additional salary sacrifice plus the employer's NI saving from that. All 4 together add up to £1038, then there's an admin fee of abut £22 deducted leaving £1016, which is £12192 p.a.

I intend to dump a one-off cash payment of £20k into the fund, which with tax relief would increase the total to £25k. The two figures of £12k + £25 = £37, which is close to but ok wrt the £40k limit.

Question is this: is the additional tax benefit of the one-off cash contribution included in the £40k limit? If I added £25k the tax benefit will be £6250, which takes my total contribution to £43250. Or do I have to limit the cash payment to about £22k (+25% = £27500) to stay within the limit?

Thanks for looking.

Username03725

Have found the answer; it is. The total includes all contributions including those from the taxman.

dunstonh

Username03725 said:

Have found the answer; it is. The total includes all contributions including those from the taxman.

The taxman doesnt make a contribution.  

Username03725

dunstonh said:

Username03725 said:

Have found the answer; it is. The total includes all contributions including those from the taxman.

The taxman doesnt make a contribution.  

If I pay in a lump sum of £10k the additional tax benefit of 25% is £2500, which makes my lump sum contribution plus the tax relief £12500 (as long as it's within the £40k annual limit).

Semantics, but the taxman has contributed to my pot, and that was my question - is that component included in the annual limit. Answer = yes.

Dazed_and_C0nfused

The basic rate tax relief added source is yes.

Any personal income tax benefit is not included.