Reclaiming "lost" personal allowance from pension contribution

intalex

Hello!

A relative will be paid a bonus this month which will take his taxable earnings to approximately £125k, thereby eroding virtually all his personal allowance.

He therefore wants to contribute £25k gross into his pension before the end of the tax year, so that his total earnings after tax-free pension contributions is £100k max.

His company doesn't operate a one-off bonus sacrifice pension contribution option to get this done through payroll, so he can contribute £20k into the pension (+ £5k basic tax relief added automatically) and claim higher tax relief from HMRC.

Seeing as he won't receive any personal allowance through PAYE (with the full £125k passing through payroll), will the higher tax relief claim (when paid) include the reinstatement of the personal allowance?

Thanks in advance for your input!

Dazed_and_C0nfused

He can only get basic rate tax relief via the pension provider.

Any additional relief due will be given by HMRC when he completes his 2021:22 Self Assessment return.  Any relief due will be via the Self Assessment calculation, either a smaller bill than would otherwise be due or a refund.

HMRC will likely include some pension relief in the 2022:23 after the return is filed.  This is not allowing relief for 2021:22, it is an assumption that similar pension contributions will be made in 2022:23.  If that isn't going to be the case then they should get their tax code amended again to avoid underpaying tax and getting a large bill for 2022:23.

Also, just be sure he has earned £125k doesn't mean his current tax code doesn't include any Personal Allowance.  Tax codes are often behind the curve when it comes to this situation.

And don't forget the Personal Allowance is based on adjusted net income, not taxable income.  So £100k, net of pension contributions + say £300 interest and £500 dividends = ANI of £100,800 and still loss of £400 of the Personal Allowance.

intalex

I understand, but he doesn't complete a tax return and will likely write to his tax office to claim the higher tax relief.

I guess the simple version of the question I have is whether any gross pension contributions made directly by him will "effectively" be deducted in determining his personal allowance.

For National Insurance, we know that pension contributions out of "net earnings" do not reinstate any national insurance already deducted during payroll. For Personal Allowance, can you effectively restore your personal allowance by making pension contributions out of "net earnings" or is whatever "lost" during payroll irrecoverable just like National Insurance?

Dazed_and_C0nfused

He would be wasting his time contacting HMRC like that as they will not make any refund in this scenario.

When your taxable income exceeds £100k completion of a Self Assessment return is mandatory.

I think you are getting confused about tax codes.  They are just provisional, it is the Self Assessment return (in this particular situation) which establishes the actual liability/refund for the year.

Do you know this person's current tax code?

intalex

Thanks, I will let him know that self assessment is mandatory in that case.

However, to make the decision whether to contribute or not, I would appreciate an answer to my question - will his personal allowance be fully reinstated if on £125k processed through payroll he ends up making a £25k gross contribution (£20k + £5k basic relief)?

Dazed_and_C0nfused

Yes however I think it is highly unlikely that that will be their only taxable income so the end result won't necessarily be what they expect.   Final paragraph of my original post refers.

https://www.gov.uk/guidance/adjusted-net-income

intalex

Dazed_and_C0nfused said:

Yes however I think it is highly unlikely that that will be their only taxable income so the end result won't necessarily be what they expect.   Final paragraph of my original post refers.

https://www.gov.uk/guidance/adjusted-net-income

Didn't see the final paragraph earlier, that explains it perfectly, thanks. Yes, factoring in all taxable cash and BIK elements in coming up with £125k gross (interest on savings is below PSA). Main concern was about personal allowance, as national insurance was already a lost cause without a sacrifice/exchange option.

Dazed_and_C0nfused

(interest on savings is below PSA).

All that means is that there is no more than £500 of taxable interest.  Which is part of his adjusted net income.  Even though it is taxed at 0%.

So £100,000 + £500 interest = actual adjusted net income of £100,500.

Personal Allowance = £12,320 not £12,570

An extra £250 of income taxed at 40% = £100

Effective tax rate on £500 of savings income = 20%.

intalex

Oh I see, so interest up to the PSA isn't excluded from adjusted net income, interesting. Fair enough, will adjust pension contribution accordingly. Thanks again for your rapid answers.

intalex

Hello, my relative has just tried to make the contribution into his pension, only to be told by the pension company that as it's the first time he is paying directly into it (so far all payments have been from employer), he has to wait for them to send out forms which he needs to fill in and send back, and then he can complete paying the contributions. They don't appear to have a way to do all this online, so has to be done with hard copies of forms sent by post.

Obviously, this is rather late to do given the deadline of next Tuesday to get the contributions recorded in the current tax year, but is this a normal ask from customers at the risk of potentially missing the deadline? Has anyone experienced this and/or found a workaround to avoid missing the opportunity?

Dazed_and_C0nfused

Why not just open a new pension and worry about where the money is later?