Contributing over the 40k AA

SpeedSouth

Hi,
I'm currently in my last year of using 3 years of unused pension contributions.  Moving into 22/23, I'd potentially still want to put over the 40k into my pension, so have some questions on this.
1. I currently use SS so it makes sense  as even though I won't get the 20% uplift I'll still get 12% ni plus half of my employers saving.  Are employers able to contribute more than 40k knowingly?

2. Would I need to let my pension provider now I don't warrant tax relief on part of the contributions?

3. Currently I make extra payments to a SIPP as I can't put more into workplace as I'll end up on less than min wage.  My assumption would be if I did this, I'd still get 20% uplift.

zagfles

1. Yes, it's perfectly legal to exceed the AA, you just get taxed. But if you're putting over £40k in by sal sac, you must be earning over the NI UEL, which means some or all of the NI relief will be at 2% (and 3.25% next tax year) rather than 12% (13.25% next tax year).

2. No (that's if you exceed the tax relief limit, not the AA). If you exceed the AA you have to do a tax return and declare it, and they'll tax you extra (basically withdrawing the tax relief)

3. Yes, as long as you don't exceed the tax relief limit, ie your gross SIPP conts are no more than your post sal sac earnings. But you'd get taxed on the AA excess, so it'd effectively be taken back as above.

jamesd

You wrote about not getting the 20% uplift. That implies that you may be thinking about using salary sacrifice to make payments into your income tax personal allowance range. Your employer isn't allowed to pay you less than minimum wage in any individual pay period. This means it's normally impossible to use salary sacrifice into your personal allowance and also comply with the minimum wage law. Part way into your band you'll also get into the area where there is no employee NI being due so you'd get no NI saving for that portion.

In any case, the 25% that is added to a SIPP contribution when the SIPP operates relief at source, as all non-workplace ones do, is a greater gain than the potential NI saving.

1. It's fine for employers to pay in more than 40k, it's up to you o ensure that you have enough annual allowance and carry-forward allowance available. It's likely to be a wrong move to sacrifice below minimum wage, which your employer will refuse to do, or into your income tax personal allowance range, which is less good for you than the SIPP.

2. If it's by salary sacrifice the pension provider doesn't need to be told that you do or don't want tax relief because your contributions are done as employer contributions and those never get tax relief added anyway, because they are pre-tax so tax was never deducted in the first place. If into the SIPP, you'd tell them and they would probably refuse to accept the contributions you don't want tax relief on. But in the SIPP you're entitled to relief on your whole after sacrifice gross pay (net contribution probably 80% of that) including the bit within your income tax personal allowance.

3. Yes, you still get 25% added to the SIPP contributions to give you the 20% basic rate relief. Applies even inside your income tax personal allowance where no income tax would be payable anyway.

SpeedSouth

Currently I earn 53k (so most at the 12%), sacrificing down to about 18k, with employer conts the amount that hits is around 38k.  The carry over amounts have been paid into my SIPP from taxed income previously.

I'll run the figures then and see if it still stacks up to over contribute without carry over.

zagfles

I can't see how it would make sense to pay into the SIPP if you exceeds the AA. No NI saving, tax relief effectively removed by the AA charge, and likely tax on the way out. Unless there's some other benefit eg tax credits/UC.

SpeedSouth

Yeah it's the impact it has on the tax credits.  Whether that amount contributed without tax relief is offset by the tax credits.

I'm hoping for a pay rise in NY which would mean I could get 3.25% on some of it as well if I could contribute more to the workplace without hitting min wage.

jamesd

The annual allowance charge will negate the income tax relief of the extra pension contributions. But it won't affect the NI benefits that could still make it worth doing via salary sacrifice, particularly when you're saving at least 12% employer NI (and soon the care supplement) and getting some of the employer NI saving.

Catch with that plan is that your pre-sacrifice pay doesn't look high enough for it to be exploitable due to the minimum wage constraint. Which means sacrifice down to minimum wage and use SIPP contributions to use the rest of the 40k. Or perhaps deliberately accumulate some unused allowance for two or three years to provide for possible further pay increases and use it up with SPP contributions year by year if you end up not needing it.

SpeedSouth

Picking this one up as I have now received the pay rise.  As of 1st April I'm earning £67K.

At this point unsure if work will allow me to SS over and above the £40k, whilst still staying above min wage.

So the 2 ways this could work are:-
1. SS down to around £32K taking into account employer conts (assuming they impose a limit)
2. SS down to around £20K (no limit imposed)

If I went with option 1, I'd then make a lump sum payment to SIPP at the end of 22/23, brining them both to the region of £50K paid to my pension.

In either scenario by my reckoning the tax charge will be 20%, as my gross salary in option 1 + £10K (contributions over £40K) are under the £50,270 HRT.  Is that correct?  

All I'd need to do then is a tax return at the beginning of 23/24 is it, stating what I have done?  Then I will see a charge of £2K (20% of the £10K over the AA)

The charge I will pay in extra tax would be negated by tax credits, more so if it is all by SS getting more NI relief.  Is that £2K charge taken as a lump sum or would it just be worked into my tax code for the year?

Dazed_and_C0nfused

Is that £2K charge taken as a lump sum or would it just be worked into my tax code for the year?

As you are filing a Self Assessment return there are normally two possibilities,

If you file the 2022:23 return before 31 December 2023, owe less than £3,000 (in total, not just the annual allowance charge) and are earning enough the underpayment can be included in your 2024:25 tax code.

If you file the return after 30 December 2023 or owe more than £2999.99 or your tax code cannot support collection of the underpayment then you will have to pay it direct to HMRC by 31 January 2024.

HMRC's rules are fairly strict on collecting tax via your tax code so if you owe say £2,500 but will only normally be paying £2,000 (for example low taxable pay due to salary sacrifice) you cannot have it included in your tax code and will have to pay it direct to HMRC.

Unless the Self Assessment rules change in the meantime!

zagfles

You might be able to use "scheme pays", see https://www.gov.uk/guidance/who-must-pay-the-pensions-annual-allowance-tax-charge

Note you still have to do a tax return even if the scheme pays the charge.

michaels

zagfles said:

You might be able to use "scheme pays", see https://www.gov.uk/guidance/who-must-pay-the-pensions-annual-allowance-tax-charge

Note you still have to do a tax return even if the scheme pays the charge.

Was about to suggest this, scheme pays is probably beneficial as it comes out of the untaxed contribution not taxed income.