Annual Allowance exceeded - USS Scheme Pays?

Simes122

Just worked out that I have contributed £2023 above my £40k annual allowance.  Carried forwards used up - have checked.  I’m in Scotland and the overpayment would be subject to 41% tax, thus a tax liability is due of £829.43 in respect of the overpayment.  

If I use scheme pays, my understanding is that with USS, the liability would come off my DC pot.  It will reduce by £829 - is that correct? 

This would correct the situation as I understand things.  I’ve salary sacrificed into it, thus never paid tax or NI on the £2023 that went in.  My pot now reduces by 829 using scheme pays, leaving £1194 of the overpayment in the DC pot.  And then when I withdraw, I pay tax again on that now £1194 at my marginal rate (albeit 25% of it tax free). My marginal rate will be 41% in retirement unless the HR threshold changes.

So £1194 becomes £298.5 tax free, plus £895.5 x 0.59 = £298.5TF + 528.34 = £826.85 net.

Had I not overpaid, I’d have £2023 via paye subject to tax and NI (41% +13.25%) = £925.52 net

My enthusiasm has cost me around £100 - is that about right?

if I don’t use scheme pays I’ll be worse off because I’d be using net salary already reduced by 41% tax and 13.25% ni, to pay a tax bill.  Is that how it works?  Advantage: scheme pays?

MX5huggy

What tax year are you referring to? Because I think USS is at least partially a DB scheme so the AA used is calculated using Pension Input Amount which is not simply the money put in but the growth in the value of the benefits. You should have your PIA for last tax year but it’s unknown for this year ATM. 

Simes122

21/22.  Member statement was there today when I looked.

MX5huggy

Ok so we’re talking about 21/22? Remember for AA you have 3 years carry over so unless you hit £40k in each of the 3 years before you don’t have an issue. 

Simes122

MX5huggy said:

Ok so we’re talking about 21/22? Remember for AA you have 3 years carry over so unless you hit £40k in each of the 3 years before you don’t have an issue. 

“ Carried forwards used up - have checked.”

Simes122

To close this off - it's academic as the tax charge is under £1000, therefore scheme pays cannot be used.

I therefore need to pay £829 underpaid tax via my tax return for tax relief I shouldn't have had which raises the double taxation issue (I'll be paying a tax charge with income that is tax paid already).

My £2023 stays in my pension DC pot though which did save me £253 NI going in, which helps, as the underpaid tax charge payment itself will have been subject to less NI and no NI liability in retirement.

I obviously pay tax on that £2023 when I withdraw as pension at 0.75 x £2023 x 0.21 (my to be retirement marginal rate is 21% hopefully as opposed to 41% now).   I can't quite get my head around the exact figures, but I'm slightly worse off in tax terms overall than if I'd taken that £2023 as PAYE, tempered somewhat by the NI avoided.  I think.  

EdSwippet

Simes122 said:

If I don’t use scheme pays I’ll be worse off because I’d be using net salary already reduced by 41% tax and 13.25% ni, to pay a tax bill.  Is that how it works?  Advantage: scheme pays?

Yes. Scheme pays is always the better option, where available. And odds are that you come out worse off than not having made this part of your pension contribution; the culprit is indeed double-taxation. Not accidental. It's intentionally built into the pension rules.

Could be worse. Suppose you are above the AA and also above the LTA, no scheme pays. 41% tax on your contribution and then 55% on your withdrawal comes to 96% tax. And 101% if in the 46% Scottish bracket. These sort of tax rates would be funny if they weren't tragic.