Tax on annual pension allowance excess and salary sacrifice

Dead_keen

mike12738561 said:

Sounds like I will need to study the legislation in depth.

Strange that this isn't common knowledge - I would think a lot of people must end up paying in more than their annual allowance via salary sacrifice.

It's not common knowledge (or stuff that most tax professionals would know). I was surprised that it worked like this when I looked at the legislation.  Since my above post, I've done some googling and can't see anything to say that the pension annual allowance charge could taper the personal allowance.  So I've got more confident since that since my skim through the legislation this afternoon.

I would expect that it is quite rare for people to be in this situation. Most people who have gone over the annual allowance (including carried forward) are likely to have been in the annual allowance taper regime and so are quite clearly 45% taxpayers (where tapering of the personal allowance is just not relevant).

mike12738561

Dead_keen said:

I would expect that it is quite rare for people to be in this situation. Most people who have gone over the annual allowance (including carried forward) are likely to have been in the annual allowance taper regime and so are quite clearly 45% taxpayers (where tapering of the personal allowance is just not relevant).

I guess my own circumstances (current pension that I have not paid into for 10 years is not recognised, so I cannot use the carry forward) are rare. Having said that, there are millions of people in the country, so rare would not imply unique.

As my old pension is very small and I am advancing in years, this has led me to wanting to put as much in my new pension as possible. But, due to these bizzare rules that require a pension to be held 3 years ago to be able to carry forward, combined with my current pension not being recognised, I will end up paying tax on the excess one way or another, either by taking it as a salary, or putting into my pension and paying tax. Hence I ended up here trying to work out how much tax I would pay if I put it into my pension.

Would it be worth phoning up HMRC and asking them? Do they provide accurate information like this? Or would the only reliable way of getting such information be paying a tax adviser?

Dead_keen

I don't pretend to understand your circumstances.  If you have an old UK registered pension then, even if it is very small and very old, carry forward would be available.

I would not expect that any HMRC helpline would be able to give you positive confirmation but by all means try it if you have the time.   This is because it is a geeky question and the answer is not set out in their manuals.

Paying a tax adviser is another answer.  This is not likely to be an area that most (99.9%+) tax advisers would know off of the top of their heads.  If you give them my earlier post with the section numbers / steps in it might point them in the right direction and they may be able to confirm what I have set out. But then again, they may not.   

najan49

Dead_keen said:

mike12738561 said:

Dead_keen said:

b. £100k after salary sacrifice then the £20k will effectively be taxed at 60% (so £12k of tax).

From this, I understand you consider that the excess pension contribution of £20K will be added to the gross salary of £100K, resulting in a loss of personal allowance and a marginal tax rate of >60%?

Actually, it looks like there is no loss of personal allowance with the pensions annual allowance charge.  On the basis that I'm retired and am just skimming the legisaltion on line...

The annual allowance charge is taxed at the individual's marginal rate (so 20%, 40%, 45%) to the extent it is in the band (my £10k at 20% and £10k at 40%) example.  This is s227(41) FA 2004 - https://www.legislation.gov.uk/ukpga/2004/12/section/227  But this is a strange way for the tax system to tax something. This strange way may mean that the annual allowance is not tapered away.

The personal allowance is set out in s35 ITA 2007 and this is where the taper is.  It is based on "adjusted net income" and this is, itself, based on "net income".  The term "net income" is defined in Step 2 of s23 ITA, the personal allowance is then deducted in Step 3.  The annual allowance tax due is then added to the tax due in Step 5 (by virtue of s30 ITA). 

So this means that method for calculating the taper of the personal allowance doesn't count the pension annual allowance tax charge.  I might be wrong as I'm skimming this before a dog walk.  But you might be lucky and only have to pay the tax at the 40% rate.

It does seem like this is deliberate, as FA 2004 section 227 (5) says:

The chargeable amount is not to be treated as income for any purpose of the Tax Acts.