Relevant earnings and tax relief on pension contributions

moedeeb

As redundancy looms in March this year I want to minimise tax on my exit package.

I have a taxable income in 21/22 of £86,000 and will have total gross contributions to pension schemes (work scheme and SIp) of £67000.  This pension sum includes this years Annual Allowance and carry over AA from the previous 3 years. I have reached the AA plus carry over threshold so can’t add any more to pensions this year. Without tax charges.

The 86,000 includes salary, PILON, redundancy payment over the 30k tax free threshold and some accrued holiday pay. I have an in payment DB pension income of 13k which I understand does not count as “Relevant earnings” 

So my total pension contributions 67K are within Annual allowance limits and in this tax year I will have relevant earnings of around 73K. but my taxable income is 86K.

Can anyone let me know the relationship between the 73k and 86K above. I have paid 40% tax on the DB pension income but the income does not count as relevant earnings. Will  I get the 20 % ( over relief at source)  I have paid on this income back as a rebate once HMRC has reconciled everything and I make a claim for higher rate tax refund?

Dazed_and_C0nfused

Firstly there is no set 20% to get back.

Can you clarify which method(s) (relief at source, net pay, salary sacrifice) you have used to get the £67,000 into your pension as that is essential to understand the mechanics of higher rate tax relief.  And the gross amount contributed for each method used.

moedeeb

Thanks for quick response . My employer has paid  33k to staff pension via salary sacrifice and I have added post tax additional payment to my SIP which when the 25% relief at source extra is added comes to 34K that makes up the £67K.  

Dazed_and_C0nfused

The relief at source contribution will increase your basic rate band from £37,700 to £71,700.

So unless there is anything not previously mentioned (Gift Aid, Covid-19 WFH expenses, other job expenses etc) you will still have nearly £2k of income taxable at higher rates so won't be getting all the 40% tax deducted back.

Would you prefer to get some provisional higher rate tax relief back asap or sort everything in one go?

sheslookinhot

For interest, does the redundancy payment qualify as earned income and hence a factor for pension contributions?

moedeeb

Thanks dazed and confused. I think you are saying that my opportunity for tax relief is limited to whatever my maximum relevant earnings are in 21/22 rather than the actual tax I have already paid and will pay which is based on the taxable income of 86K is this correct? On the timing I don’t really care as long as I take the most tax efficient route.

On the redundancy pay query it is only the taxable element of my redundancy payment above 30K that counts as relevant earnings.

I do still have an option to change the way my annual bonus is paid (in March) currently I have asked for about 7K to be salary sacrificed which I assumed was the best approach and that 7k is included in the gross pension contributions for this year the £67k referenced in my post.  I could ask for it to be paid and have tax and NI applied which would up my relevant earnings by the 7k sum. Would this make any difference?

moedeeb

I think I might have to steal the dazed and confused title as it is all getting a bit complex!

zagfles

sheslookinhot said:

For interest, does the redundancy payment qualify as earned income and hence a factor for pension contributions?

Only the taxable part, the tax free part doesn't. See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#earnings for details

zagfles

The "relevant earnings" limit is a limit on the amount of contributions that you can get tax relief on. You are well within that limit, your sal sac contributions aren't relevant for this (other in that they have already reduced your taxable income), so with relevant earnings of £73k and RAS contributions of £34k you are well within the limit. So not an issue. So you can now forget about relevant earnings, the actual tax relief you get depends on total taxable income. So with £86k taxable income and £34k gross RAS contributions the relief will all be at 40%, assuming no other tax reliefs etc.

moedeeb

Thanks zagfles that makes sense I can now wait for the various payments and reconciliation to take place. I have already made my Sip lump sum payments as when I actually get my redundancy package on the 27th March it will be too late to ensure that a lump sum would reach my pension in this tax year. I will probably move to UFPLS in 22/23 tax year. It seems clear to me that all the additions to my pension are part of normal retirement planning but do I need to worry about lump sum recycling rules in what I am planning?

Dazed_and_C0nfused

You do need to notify HMRC of the relief at source pension contributions so that they can factor that in when they review the 2021:22 tax year.

HMRC often assume contributions in one year will continue in the next year so you will need to supply an estimated figure (£0 if necessary) for 2022:23 so that your tax code for 2022:23 doesn't provisionally include relief you will eventually have to pay back.