£40,000 pension annual allowance limit for higher-rate taxpayers

hallmark

Basic questions but can't find the answer easily via Google.

I understand that presuming you earn enough the annual allowance is £40k.  Does that mean you can contribute £40k into a pension (which would get topped up to £50k) or that you can contribute up to £32k (that would get topped up to £40k)?

Also, how exactly does this work for higher-rate taxpayers?   As I understand it, in addition to the above you can also claim a further 20% on however much you were a higher rate taxpayer for (or in other words, if you earnt say £60K and paid higher rate tax on £10k of it, you could claim 20% back via self-assessment).   If that's correct though, would that mean you could contribute even less than £32k into the pension or do you only ever get 20% as a topup, and anything else would be as a tax rebate (or offset) via self-assessment?

Thanks

aroominyork

You can increase your pension by £40,000 gross. That means £32,000 net which it topped up by HMRC to £40,000. The higher rate benefit - usually claimed through self-assessment - does not add money to your pension; instead you receive it as a cash refund from HMRC or through an amendment to your tax code to reduce the amount of tax you pay. So the bottom line is that your pension is upped by £40,000 at a cost to you of £32,000 - £8000 = £24,000. Note that employer's and employee's workplace pension contributions count towards the £40,000 annual allowance (though only the employee's contribution counts towards the salary cap on pension contributions); example, salary of £100,000 with 4% employee's and 6% employer's contribution means £10,000 goes into your pension leaving £30,000 which you could contribute through £24,000 net and then reclaiming £6000.

NoMore

Also just to be clear the AA of 40k per year applies to all contributions to all pensions in a single tax year, including any employer contributions

Albermarle

There are three ways to make pension contributions from your salary, depending on what method your employer chooses to use.

You can increase your pension by £40,000 gross. That means £32,000 net which it topped up by HMRC to £40,000. The higher rate benefit - usually claimed through self-assessment - does not add money to your pension; instead you receive it as a cash refund from HMRC or through an amendment to your tax code to reduce the amount of tax you pay

The above only applies to contributions made via 'Relief at source' contributions . In English it means the contributions come out of your taxed pay.

If your contributions are taken from your salary before it is taxed , this is confusingly called a ' Net Pay scheme' 
If your salary is reduced and your employer makes your contributions for you effectively, this is known as a 'Salary Sacrifice scheme'

For the latter two schemes, there is no tax relief to be added or claimed, as the contributions are never taxed in the first place. 
THis is a useful site for pensions info
Pensions and retirement | Help with pensions and retirement | MoneyHelper

Tax relief on pension contributions | MoneyHelper

Linton

Plus DB pensions are more complicated, but it's not worth trying to explain them unless you have one.

Plus there is carry over from unused Pension Annual Allowance in the 3 previous years subject to conditions, but not of the earnings cap.

dunstonh

£40,000 pension annual allowance limit for higher-rate taxpayers

£40,000 is the annual pension allowance. It is not a limit for higher rate taxpayers.  You can be a non-taxpayer and still have £40,000 go into your pension potentially.    Indeed, you can exceed the £40k in a number of scenarios too and still be a non-taxpayer.

I understand that presuming you earn enough the annual allowance is £40k.  Does that mean you can contribute £40k into a pension (which would get topped up to £50k) or that you can contribute up to £32k (that would get topped up to £40k)?

No.   If you contribute £40k to the pension then tax relief is not added on top. Tax relief is not a bonus.  It is a relief.  It reduces your payment.

hallmark

Albermarle said:

There are three ways to make pension contributions from your salary, depending on what method your employer chooses to use.

You can increase your pension by £40,000 gross. That means £32,000 net which it topped up by HMRC to £40,000. The higher rate benefit - usually claimed through self-assessment - does not add money to your pension; instead you receive it as a cash refund from HMRC or through an amendment to your tax code to reduce the amount of tax you pay

The above only applies to contributions made via 'Relief at source' contributions . In English it means the contributions come out of your taxed pay.

If your contributions are taken from your salary before it is taxed , this is confusingly called a ' Net Pay scheme' 
If your salary is reduced and your employer makes your contributions for you effectively, this is known as a 'Salary Sacrifice scheme'

For the latter two schemes, there is no tax relief to be added or claimed, as the contributions are never taxed in the first place. 
THis is a useful site for pensions info
Pensions and retirement | Help with pensions and retirement | MoneyHelper

Tax relief on pension contributions | MoneyHelper

That's interesting, I hadn't appreciated the distinction with salary sacrifice.

So as an example if an employee contributed say £20,000 into his pension via salary sacrifice AND wanted to make contributions into a SIPP from his taxed pay, would that mean he could contribute a further £16,000 (that would be topped up to £20,000) or the whole £32,000 that gets topped up to £40,000? (I'm presuming the former)

thanks again

Albermarle

hallmark said:

Albermarle said:

There are three ways to make pension contributions from your salary, depending on what method your employer chooses to use.

You can increase your pension by £40,000 gross. That means £32,000 net which it topped up by HMRC to £40,000. The higher rate benefit - usually claimed through self-assessment - does not add money to your pension; instead you receive it as a cash refund from HMRC or through an amendment to your tax code to reduce the amount of tax you pay

The above only applies to contributions made via 'Relief at source' contributions . In English it means the contributions come out of your taxed pay.

If your contributions are taken from your salary before it is taxed , this is confusingly called a ' Net Pay scheme' 
If your salary is reduced and your employer makes your contributions for you effectively, this is known as a 'Salary Sacrifice scheme'

For the latter two schemes, there is no tax relief to be added or claimed, as the contributions are never taxed in the first place. 
THis is a useful site for pensions info
Pensions and retirement | Help with pensions and retirement | MoneyHelper

Tax relief on pension contributions | MoneyHelper

That's interesting, I hadn't appreciated the distinction with salary sacrifice.

So as an example if an employee contributed say £20,000 into his pension via salary sacrifice AND wanted to make contributions into a SIPP from his taxed pay, would that mean he could contribute a further £16,000 (that would be topped up to £20,000) or the whole £32,000 that gets topped up to £40,000? (I'm presuming the former)

thanks again

It would be £16 K and tax relief of £4K would be added.

However two points about the £40K annual allowance.

As already mentioned by a previous poster, employer contributions have also to be included. So in fact if you agreed to a salary reduction of £20K , then the employer would add £20K + whatever their contribution was.

If you have not used the full £40K allowance in the previous three tax years, you can bring this unused allowance forward, so add more than £40K in total. However you personally can never add more than your gross salary, regardless of how much unused allowance you have . In simple terms if you have a lot of unused allowance, you need a high salary to take advantage.

hallmark

Thanks Albermarle and everybody else.  My reason for asking is having been semi-retired I've been offered a contract that might mean I earn enough in this tax year and/or next tax year that these things are considerations.  Being mid-50s it makes sense to boot a lot into pensions.

xylophone

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/pension-contributions-the-basics/

UncleK

This is good - just learnt something about what is "relevant UK earnings" and what is not. Thanks!