Pension Annual Allowance charge

tojoslaffy

Hi. It would appear that I will exceed my annual allowance by approx £13,000 in the 2022/23 tax year due to my purchase of additional years in my defined benefit scheme. I intend to pay the charge myself through my tax return rather than using scheme pays. My question is what the tax rate will be be. My gross income will be £60k, but with my additional years pension payments my net pay will be around £30k. So will pay charge be £13k x 40% or £13k x 20%? Thanks 

Linton

Have you taken into account that unused annual allowance can be carried forward from the 3 previous years?

I dont think the information you have given is in the best form to understand your tax position.  Your gross pay is £60K.  How much have you paid personally as part of your standard DB pension and how much for the extra years?

tojoslaffy

Hi Linton. I have used up my unused annual allowance and my 2022/23 PIA will be £53,300. I currently have 6 contracts for 28.7 yrs of additional yrs at 44% of my current pay. I will take the hit on the charge rather than cancelling the contracts as  i plan a 2026 early retirement and don't foresee a further annual allowance charge due to the high interest rates that are likely over the coming few years. The benefits of the contracts will outweight the one off charge I think.

Linton

tojoslaffy said:

Hi Linton. I have used up my unused annual allowance and my 2022/23 PIA will be £53,300. I currently have 6 contracts for 28.7 yrs of additional yrs at 44% of my current pay. I will take the hit on the charge rather than cancelling the contracts as  i plan a 2026 early retirement and don't foresee a further annual allowance charge due to the high interest rates that are likely over the coming few years. The benefits of the contracts will outweight the one off charge I think.

Thanks but I dont think it answers the question.  The PIA determines the total value gained against the Annual Allowance.  What it doesnt do is determine the tax which is based on what you actually contribute from your gross income.

See https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/annual-allowance/ and click on Defineed Benefits Pensions some way down the page.

AIUI any amount over the AA is added to your gross income for tax calculation purposes.  So it would appear that you will be taxed on £60K+£13K-your total pension contribution. If your total pension contribution is greater than £23K you would still be only paying basic rate tax.  Otherwise you will pay higher rate tax on the amount under £23K.

However there are others with a greater knowledge of these things than me so I will leave them to comment.

EdSwippet

tojoslaffy said:

I intend to pay the charge myself through my tax return rather than using scheme pays.

On this point, have you identified for certain that this is definitely the best route to covering this tax charge?

There are some edge cases where 'scheme pays' generates worse outcomes, typically (it seems) around DB schemes such as the NHS pension scheme (fiddly calculations required?). In general though, and certainly in DC pensions, using 'scheme pays' tends to give a better outcome, because it in effect pays your tax from pre-tax money. Otherwise, you can end up paying it from post-tax money, which can lead directly to double tax.

Just checking, then.