Reclaiming "lost" personal allowance from pension contribution

intalex

That's a good idea, any pension scheme providers known to have a rapid (online) registration, basic tax relief enabling, and paying in? Preferably with simplified investment options (low risk, medium risk, high risk, etc)?

QrizB

intalex said:

That's a good idea, any pension scheme providers known to have a rapid (online) registration, basic tax relief enabling, and paying in? Preferably with simplified investment options (low risk, medium risk, high risk, etc)?

Lots of them. Vanguard is a name that comes immediately to mind.

Marcon

intalex said:

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?

Perfectly normal. It's up to the customer to plan ahead, rather than for the insurer to change their processes to accommodate them (but happily there is a workround as someone has already flagged).

intalex

Just to update, the additional contribution was completed just in time (dated 5th April) and made it in the 21/22 tax year, together with addition of the basic tax relief.

We have also populated the online self assessment, and I can now see that it's the basic rate tax band/threshold that gets extended, and also that savings interest can affect the personal allowance reduction despite remaining non-taxable under PSA.

Had some confusion in choosing between box 1 and box 3 of the pension tax relief section to enter the relevant values, mainly because they are worded as follows:

Box 1: Payments to registered pension schemes (also known as PPR) operating relief at source
Box 3: Payments to your employer’s scheme which were not deducted from your pay before tax

Technically, the scheme is an employer's scheme (is this a subset of registered pension scheme or something different?) and the contributions were not made via salary exchange and were instead paid using cash from his net pay, so an easy mistake to have chosen box 3 in my opinion. This box 3 on the online self assessment could use more clarification to avoid this mistake, with things like "paid directly by employer on behalf of employee" and "without addition of basic tax relief" to make it very clear.

Eventually realised what box 3 actually meant after seeing the numbers and calculations flow through (albeit not an easy spot), and switched the value back to box 1.

Dazed_and_C0nfused

savings interest can affect the personal allowance reduction despite remaining non-taxable under PSA.

paid directly by employer on behalf of employee

ISA interest is non taxable.

Other interest is taxable. Some may get taxed at 0% but it's still taxable and is also still part of your adjusted net income.

I'm sure it could be clearer but there is no need for that entry as an individual cannot get tax relief on employer contributions. That's why there is no pension tax relief with salary sacrifice, they are actually employer contributions so £100 sacrificed means just £100 is added to the pension fund (by the employer).

intalex

Thank you all for your input and guidance.

I've tried to summarise the following newbie approach to look at pensions:

Step 1: Work out gross personal contribution into pension = amount paid into pension x 1.25 (the 0.25 is the 20% basic tax relief)

Step 2: Work out adjusted net income (ANI) = gross employment income + gross interest on non-isa savings - gross personal contribution into pension

Step 3: Work out personal allowance (PA) based on ANI: if ANI ≤ £100k then full PA, else PA tapered by £1 for every £2 of ANI above £100k

Step 4: Work income subject to tax = gross employment income + gross interest on savings - PA

Step 5: Adjust basic rate tax limit/band to: £37,730 + gross personal contribution into pension

Step 6: Apply the relevant adjusted tax bands to income subject to tax, to work out taxes

For those with gross annual earnings (employment + savings interest) between £100k - £140k in particular, it makes a lot of sense to make personal contributions into pension which bring ANI down to ≤ £100k in order NOT to lose any of the PA

Experts and Regulars - your comments and refinements to these steps will be much appreciated

Mutton_Geoff

Another tip if you've bust the £100k and your tax code has been cut to allow for this but you plan to make one off or infrequent pension contributions is to tell HMRC your projected earnings for the year will be £99k and you'll get your full allowance reinstated.

Then adjust your taxable income with pension/AVC contributions through the year (of even lump sum in March) to make it so.

https://www.gov.uk/tell-hmrc-change-of-details/income-changes

Pat38493

Mutton_Geoff said:

Another tip if you've bust the £100k and your tax code has been cut to allow for this but you plan to make one off or infrequent pension contributions is to tell HMRC your projected earnings for the year will be £99k and you'll get your full allowance reinstated.

Then adjust your taxable income with pension/AVC contributions through the year (of even lump sum in March) to make it so.

https://www.gov.uk/tell-hmrc-change-of-details/income-changes

I have also done this for the last couple of years and the other advantage to it is that once they see a tax return like this, they then tell you that you don’t need to fill in a tax return anymore.  Unless of course you need to fill one in for other reasons.

Mutton_Geoff

Pat38493 said:

I have also done this for the last couple of years and the other advantage to it is that once they see a tax return like this, they then tell you that you don’t need to fill in a tax return anymore.  Unless of course you need to fill one in for other reasons.

Except of course in the circumstances I described, unless you salary sacrificed your extra contributions, you'd need to submit a tax return to get the higher relief on pension contributions made whilst you were engineering your income to stay below the £100k threshold.

intalex

Mutton_Geoff said:

Pat38493 said:

I have also done this for the last couple of years and the other advantage to it is that once they see a tax return like this, they then tell you that you don’t need to fill in a tax return anymore.  Unless of course you need to fill one in for other reasons.

Except of course in the circumstances I described, unless you salary sacrificed your extra contributions, you'd need to submit a tax return to get the higher relief on pension contributions made whilst you were engineering your income to stay below the £100k threshold.

...and, if I'm not mistaken, also to reclaim any portion of personal allowance lost via PAYE too.