Personal Pension Contributions - what counts towards the absolute limit

Qyburn

Hi,

I'm considering making lump sum contribution to our personal pensions during what is planned to be the last tax year of employment.  I believe that the limit is my total earnings, or £40K, whichever is lower.

I think that "total earnings" includes the personal allowance, meaning if I earned say £30K I could put in £30K, not £30K-£12,570, but I wouldn't mind that being confirmed.

I want to check what counts towards that limit.  Obviously contributions that I have made myself count, but do those made by my employer as well? 

And in the case of the missus, what about payroll deduction for a public sector defined benefit scheme, do these count towards that limit? I would need to check one of her payslips but I suspect there's no figure for employer contribution.

Thanks.

Dazed_and_C0nfused

Your Personal Allowance, whether it be £12,570, £11,310 or another amount due to having adjusted net income >£100k is nothing to do with your pension contribution limits.

If you earn £30k in taxable income then that is the limit for tax relief so you personally could contribute £24k and the pension company would add 25% to make a gross contribution of £30k.

You need to remember there are two totally separate limits, one for tax relief purposes and also the annual allowance.  With a DC scheme your contributions, employer contributions and the basic rate tax relief added to yours are all counted for the annual allowance.  Any personal income tax savings, for instance if you were a 21% or 40% taxpayer do not get counted.

With a DB scheme its a totally different calculation, totally unrelated to contributions!

https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/interaction-of-tax-relief-and-annual-allowance

https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/annual-allowance

NedS

Qyburn said:

Hi,

I'm considering making lump sum contribution to our personal pensions during what is planned to be the last tax year of employment.  I believe that the limit is my total earnings, or £40K, whichever is lower.

I think that "total earnings" includes the personal allowance, meaning if I earned say £30K I could put in £30K, not £30K-£12,570, but I wouldn't mind that being confirmed.

I want to check what counts towards that limit.  Obviously contributions that I have made myself count, but do those made by my employer as well? 

There are two limits that affect how much you can contribute to a pension each year (when we are talking about pension contributions, we are normally talking about the gross amounts). They are independent of each other, and both limits must not be exceeded. They are:

1. Your earnings limit. You cannot contribute more than your gross earnings. If you earn £30k gross, you cannot contribute more than £30k gross

2. The Annual Allowance limits you to £40k maximum. Generally, if you earn less than £40k per year, this will probably not affect you as you will be limited by your annual earnings in (1).

Pension contributions considered under the earnings limit are just your contributions (employee contributions), whereas the Annual Allowance considers all contributions - both employee and employer contributions.

Qyburn said:

And in the case of the missus, what about payroll deduction for a public sector defined benefit scheme, do these count towards that limit? I would need to check one of her payslips but I suspect there's no figure for employer contribution.

DB scheme are the same for your earnings limit (you cannot contribute more than you earn), but DB schemes are treated differently for the Annual Allowance. You have to calculate your Pension Input Amount (PIA) for the year and that is the value used for your AA calculation. It is generally 16 times the increase in benefits attained during the tax year. There are discussions on how to calculate in in detail elsewhere in this forum, or you can request the PIA value from the pension administrator.

Qyburn

Thanks, that keeps me straight for myself where it is solely a Personal Pension with employer contributions which are noted on my payslips.

For the defined benefit scheme the details are so obscure that I think we'll need to ask the administrator for the PIA value. 

Qyburn

Sorry, just realised I'm not totally clear on the Personal Pension side.  To give an example using round numbers if I earn £30K and my employer has put in £3,000 then is the limit for my contributions £30K?  Meaning that my contributions don't exceed my earnings, and the total of my contributions and my employer's don't exceed the £40K AA.

NedS

Qyburn said:

Sorry, just realised I'm not totally clear on the Personal Pension side.  To give an example using round numbers if I earn £30K and my employer has put in £3,000 then is the limit for my contributions £30K?  Meaning that my contributions don't exceed my earnings, and the total of my contributions and my employer's don't exceed the £40K AA.

Correct.

Your earnings limit is £30k, so you cannot contribute more than you earn (gross). The AA limit is £40k for all contributions, which would be you contributing up to your gross earnings of £30k and your employer contributing £3k giving a total of £33k, which is within the £40k limit so you are fine.

Qyburn

Perfect thanks.

retiringtoosoon

Hi, in a similar vein I have a question about salary sacrifice and annual contribution limits.

I currently earn £73.k basic a year and a £7k car allowance and am SS down to near NMW.
So I earn £6,125 basic per month,  £433 car allowance and SS £5,000 into my pension, resulting in taxable of £1,550 per month (~ £20k taxable pay for the year).

So £80k Gross, £20k taxable with £60k SS employer pension contributions. (I do have some carry forward allowance of about £20k from previous years for reference also.)

Does this have an impact on the level to which i can contribute in the year towards the annual limit which I understand is the lower of £40k or your earnings? Because i'm SS down to quite a low taxable income, does this limit the amount my employer (via SS) is allowed to contribute.

MX5huggy

retiringtoosoon said:

Hi, in a similar vein I have a question about salary sacrifice and annual contribution limits.

I currently earn £73.k basic a year and a £7k car allowance and am SS down to near NMW.
So I earn £6,125 basic per month,  £433 car allowance and SS £5,000 into my pension, resulting in taxable of £1,550 per month (~ £20k taxable pay for the year).

So £80k Gross, £20k taxable with £60k SS employer pension contributions. (I do have some carry forward allowance of about £20k from previous years for reference also.)

Does this have an impact on the level to which i can contribute in the year towards the annual limit which I understand is the lower of £40k or your earnings? Because i'm SS down to quite a low taxable income, does this limit the amount my employer (via SS) is allowed to contribute.

No. 

You have to remember with SS you don’t “earn” this money. 

The “Annual limit” is not the lower of Annual Allowance or tax relief limit. 

There are 2 rules and you must not break either of them. 

Annual Allowance £40k but with carry forward so you are OK getting £60k Salary Sacrificed depending on exactly the previous years contributions. 

Salary Sacrifice contributions don’t receive tax relief because you never receive this money so don’t get taxed on it. 

You also earn £20k this is your tax relief limit (no carry forward). Theoretically you can contribute all this to a pension and receive tax relief but then you will have used £80k of Annual Allowance which you may have but can’t do year after year. 

SpeedSouth

NedS said:

Qyburn said:

Sorry, just realised I'm not totally clear on the Personal Pension side.  To give an example using round numbers if I earn £30K and my employer has put in £3,000 then is the limit for my contributions £30K?  Meaning that my contributions don't exceed my earnings, and the total of my contributions and my employer's don't exceed the £40K AA.

Correct.

Your earnings limit is £30k, so you cannot contribute more than you earn (gross). The AA limit is £40k for all contributions, which would be you contributing up to your gross earnings of £30k and your employer contributing £3k giving a total of £33k, which is within the £40k limit so you are fine.

Does this not mean that the OP is then putting £33K into their pension whilst only earning £30K?  I thought that employers contributions should be included in the £30K maximum not on top of?

NoMore

SpeedSouth said:

NedS said:

Qyburn said:

Sorry, just realised I'm not totally clear on the Personal Pension side.  To give an example using round numbers if I earn £30K and my employer has put in £3,000 then is the limit for my contributions £30K?  Meaning that my contributions don't exceed my earnings, and the total of my contributions and my employer's don't exceed the £40K AA.

Correct.

Your earnings limit is £30k, so you cannot contribute more than you earn (gross). The AA limit is £40k for all contributions, which would be you contributing up to your gross earnings of £30k and your employer contributing £3k giving a total of £33k, which is within the £40k limit so you are fine.

Does this not mean that the OP is then putting £33K into their pension whilst only earning £30K?  I thought that employers contributions should be included in the £30K maximum not on top of?

No your confusing the two limits:

1) Tax relief limit: You can only earn tax relief up to your earned income. Employer contributions don't get you tax relief so aren't counted against this limit

2) You have an Annual Allowance of 40k, which is the maximum from all sources (including employer) you can put into a pension yearly, can be extended by previous 3 years unused allowances.

They are two separate and distinct limits with different aims, and should not be conflated together, like when people say max of 40k or earned income whichever is lower (thats bs).