WHAT IS THE MAXIMUM I CAN PAY INTO PENSION TO OFFSET TAX IN 2021/22

billywhizz1966

Hi All

Forum has always been really helpful and as we my OH and myself settle into early retirement we are just making sure we maximise the tax position for this year

My OH has benefitted from a redundancy package that has meant with her DB pension put into payment on leaving she will have received £179k in 2021/22

£30k is tax free so she would need to pay tax on £149k.

Having looked into tax rules she is entitled to use her annual allowance of £40k in 2021/22 which she has done by a combination of her AVC in April plus making a direct payment of £35k into a SIPP she had set up 

This means that she is left with £109k on which she will need to pay tax

My question is she has received her Pension Inputs Amount for the pervious 3 years that indicates she has used the following unused allowances

20/21 £54,252 (£14.252k over)
19/20  £29,087 (£11,913 under)
18/19    £30,199 (9,801 under)

So it appears £7,462 of unused allowance

I am correct in thinking she can write pay in this figure into her SIPP as well thus reducing her taxable income to £101.5k that has a double whammy of getting relief of 40% (maybe more as the over £100k bit) and reducing the amount of tax she will have to pay overall

This suggests it is possible. Could anyone with better knowledge than me please clarify my understanding 

Hoping you can follow my logic. Thanks in advance

  
           

Dazed_and_C0nfused

Personal contributions to a SIPP do not reduce the amount of income that you have to pay tax on.

What makes you think otherwise??

They do increase your basic rate tax band and reduce your adjusted net income (which the Personal Allowance is based on).

What do you mean by a direct payment of £35k?  Did she give the pension company £35k?

billywhizz1966

Sorry if I have confused you 

She has paid £35,000 into a SIPP she already had set up to use up her annual allowance for the year of £40,000 to pay into a pension

I assumed this would reduce her tax liability so she only would pay tax as if she had received £109,000 . 

If that is correct is she then able to write another cheque for the unused annual allowance figure of  £7.462

Hope that clarifies and if so she will be due back a hefty tax refund as she has paid over £56k in tax this year to date 

hugheskevi

billywhizz1966 said:

My OH has benefitted from a redundancy package that has meant with her DB pension put into payment on leaving she will have received £179k in 2021/22

£30k is tax free so she would need to pay tax on £149k.

So she received a cash payment of £179,000? In particular, none of that £179,000 was used to fund buying out an actuarial reduction to put pension into payment?

My question is she has received her Pension Inputs Amount for the pervious 3 years that indicates she has used the following unused allowances

20/21 £54,252 (£14.252k over)
19/20  £29,087 (£11,913 under)
18/19    £30,199 (9,801 under)

So it appears £7,462 of unused allowance

What was the pension input for 2017/18? Was there enough unused Annual Allowance in 2017/18 to apply to the 2020/21 breach (ie £14,252 spare)? If so, and the tapered Annual Allowance isn't relevant in any current or past year, there would be £21,714 to carry forward.

Was the tapered Annual Allowance an issue in any year from 2017/18 onwards?

If that is correct is she then able to write another cheque for the unused annual allowance figure of  £7.462

Presumably the contributions are receiving relief via Relief at Source? If so, it would be best to use gross figures throughout (ie the amount which goes into the pension, so inclusive of tax relief applied by the pension provider).

Dazed_and_C0nfused

No, you have got a basic misunderstanding of how pension tax relief works.

She has paid £35,000

That means a gross contribution of £43,750 into her pension.

That £43,750 has absolutely no impact whatsoever on the amount of her taxable income which be subject to tax.

It does mean she can pay more basic rate tax, and therefore less at higher rates.

And it also reduces her adjusted net income.  Which is what is used to calculate her Personal Allowance.

I think you have had other threads along similar lines and this has been explained before.

billywhizz1966

Apologies I have but I obviously need to change my name to Dazed and Confused (but worse)

I think I will just fill in the tax return when it comes and see what happens. I assumed I can offset the £35k reducing the amount on which she pays tax meaning only paying tax on circa £109k not £149k meaning a refund on tax already deducted to date of £56k (on redundancy payment and pension to date via PAYE) will be due to us but now no idea how much (could be anything from £6k to £28k !!!!) 

I know that you can save the amount of tax paid by paying into a pension which has all to date been done at source meaning a lower tax bill which I was hoping to clarify on here but I am obviously confusing matters how I am trying to explain it.    Apologies

Dazed_and_C0nfused

I assumed I can offset the £35k reducing the amount on which she pays tax meaning only paying tax on circa £109k not £149k

Definitely not.  

It will be changing the tax rate payable on some of her taxable income from 40% to 20%.

It will likely be helping retain some of her Personal Allowance.

It will be getting 25% addition from the pension company (which is 20% of the gross contribution).  Making it £43,750 in her pension fund.

But what it won't do is mean she only needs to pay tax on less of her taxable income.

Pension contributions in this sort of situations are very tax efficient for all the reasons above but personal contributions to a SIPP or personal pension never reduce your taxable income

billywhizz1966

hugheskevi said:

billywhizz1966 said:

My OH has benefitted from a redundancy package that has meant with her DB pension put into payment on leaving she will have received £179k in 2021/22

£30k is tax free so she would need to pay tax on £149k.

So she received a cash payment of £179,000? In particular, none of that £179,000 was used to fund buying out an actuarial reduction to put pension into payment?   

NO SHE RECEIVED IT LARGELY UNREDUCED AS REDUNDANCY WAS BASED ON EFFICIENCY OF THE SERVICE AS PART OF A RESTRUCTURE

My question is she has received her Pension Inputs Amount for the pervious 3 years that indicates she has used the following unused allowances

20/21 £54,252 (£14.252k over)
19/20  £29,087 (£11,913 under)
18/19    £30,199 (9,801 under)

So it appears £7,462 of unused allowance

What was the pension input for 2017/18? Was there enough unused Annual Allowance in 2017/18 to apply to the 2020/21 breach (ie £14,252 spare)? If so, and the tapered Annual Allowance isn't relevant in any current or past year, there would be £21,714 to carry forward.

Was the tapered Annual Allowance an issue in any year from 2017/18 onwards?

2017/18 PENSION INPUT FIGURE WAS £38,572.53 SO ONLY £1427.47 UNUSED SO IS THAT £8889.47 LEFT AFTER OFFSETTING 20/21 PENION INPUT AMOUNT. HAVING READU P ON THIS THERE IS NO TAPER ISSUE IN ANY YEAR

HER PENSION INPUT FIGURE AT THE TIME SHE LEFT ON 23 APRIL 2021 FOR 21/22 WAS £4,908.94. HAVING CHECKED HMRC SHE IS ENTITLED TO FULL USE OF PENSION ALLOWANCE OF £40K TO REDUCE TAX LIABILITY BUT I AM UNLCEAR HOW MUCH 

If that is correct is she then able to write another cheque for the unused annual allowance figure of  £7.462

Presumably the contributions are receiving relief via Relief at Source? If so, it would be best to use gross figures throughout (ie the amount which goes into the pension, so inclusive of tax relief applied by the pension provider).

I AM UNCLEAR AS I AM JUST SEEKING TO WRITE A  CHEQUE FOR THE MAXIMUM (CHECKING THIS ON THE .GOV.UK WEBSITE THIS SUGGESTS £5662 OF UNUSED ALLOWANCE LEFT THAT SHE CAN LEGITIMATELY STILL USE) THAT IT WOULD APPEAR WOULD NEED ADDING TO A SELF ASSESSMENT FORM EARLY IN APRIL 2022. JUST DIDNT WANT TO RUN INTO A PENALTY SITUATION SO ANY HELP APPRECIATED AS I AM OBVIOUSLY CONFUSING MATTERS. AFTER THIS YEAR IT WILL BE EASY AND I WONT NEED TO WORRY !!!!! BUT JUST HOPING TO GET AN IDEA ON WHAT THE BEST WAY TO MIVE FORWARD 

THANKS FOR YOUR HELP . IT IS HUGLEY APPRECIATED

Dazed_and_C0nfused

I think you need to make it 100% crystal clear what the £35,000 was.

£35,000 made up of her handing over £28,000 and basic rate tax relief of £7,000?

Or £43,750 made up of her handing over £35,000 and basic rate tax relief of £8,750?

And what other contributions have been made in the current tax year?  And what method was used to make them, relief at source or net pay (or salary sacrifice).

billywhizz1966

Dazed_and_C0nfused said:

I assumed I can offset the £35k reducing the amount on which she pays tax meaning only paying tax on circa £109k not £149k

Definitely not.  

It will be changing the tax rate payable on some of her taxable income from 40% to 20%.

It will likely be helping retain some of her Personal Allowance.

It will be getting 25% addition from the pension company (which is 20% of the gross contribution).  Making it £43,750 in her pension fund.

But what it won't do is mean she only needs to pay tax on less of her taxable income.

Pension contributions in this sort of situations are very tax efficient for all the reasons above but personal contributions to a SIPP or personal pension never reduce your taxable income

Many Thanks

Everything I have done to date has been done at source as we are both mainly getting DB Pensions which has been very tax effiicient so this is largely all new to me and HMRC have made the necessary adjustments  . 

I do like to understand it but think I am confusing myself so think I will just leave it with the IFA to advise as I seem to be getting myself into a muddle;    

billywhizz1966

Dazed_and_C0nfused said:

I think you need to make it 100% crystal clear what the £35,000 was.

£35,000 made up of her handing over £28,000 and basic rate tax relief of £7,000?

Or £43,750 made up of her handing over £35,000 and basic rate tax relief of £8,750?

And what other contributions have been made in the current tax year?  And what method was used to make them, relief at source or net pay (or salary sacrifice).

Sorry

Paying £35,000 which will mean getting £43,750 into the PRU SIPP 

Only other contribution in 2021/22 was taken at source in final pay (LGPS plus a hefty AVC payment in April only) all deducted at source). The advice from Pension Admin was £4908.94 had been used of the annual allowance and tax paid in that money was less than £200. OH got redundancy payment in May paying over £50k tax and then her pension of £35k p.a kicked in from June on which she has been paying 20% tax on only. This will all need adjusting but she has paid circa £55k tax to date in 2021/22