Keeping My Personal Allowance

zooks

Please can someone check I have this right?

If I go over the £100K adjusted net earnings limit then anything I earn between £100k and £125k is taxed at an unofficial rate of 60% and I have to do a full SA tax return.

However if I pay anything earn't over £100k into my AVC scheme to stay just under £100k then I will get an excess allowance charge on any input over £40k but this is then taxed my marginal rate which is 40% and just a basic SA regarding how the AAC is to be paid.

Is this correct?

Jeremy535897

Yes. The excess amount paid into the pension scheme is treated as income charged to tax at your marginal rate, so if your adjusted net income after deducting the contribution is say £100,000, the marginal rate applied is 40%, not the 60% effective rate that would apply because you lost personal allowance. So on a gross contribution of £20,000 fully subject to the charge, the cash flow would be:
Contribution net of tax £16,000, additional charge to tax £20,000 @40% = £8,000, tax at 20% on £20,000 due to increased basic rate band £4,000, total personal outflow £28,000, pension scheme receives £20,000, cost overall £8,000.
No contribution increased tax £20,000@60% = £12,000, pension scheme receives nothing, cost overall £12,000.
The disadvantage is that whilst overall you and the pension scheme are better off, you personally are worse off, and you will probably ultimately pay some tax on taking the extra funds out of the pension scheme. This may be mitigated if the pension scheme pays the additional tax.

See: https://www.gov.uk/tax-on-your-private-pension/annual-allowance
https://www.gov.uk/guidance/who-must-pay-the-pensions-annual-allowance-tax-charge
https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/annual-allowance
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm056130

zooks

Jeremy535897 said:

Yes. The excess amount paid into the pension scheme is treated as income charged to tax at your marginal rate, so if your adjusted net income after deducting the contribution is say £100,000, the marginal rate applied is 40%, not the 60% effective rate that would apply because you lost personal allowance. So on a gross contribution of £20,000 fully subject to the charge, the cash flow would be:
Contribution net of tax £16,000, additional charge to tax £20,000 @40% = £8,000, tax at 20% on £20,000 due to increased basic rate band £4,000, total personal outflow £28,000, pension scheme receives £20,000, cost overall £8,000.
No contribution increased tax £20,000@60% = £12,000, pension scheme receives nothing, cost overall £12,000.
The disadvantage is that whilst overall you and the pension scheme are better off, you personally are worse off, and you will probably ultimately pay some tax on taking the extra funds out of the pension scheme. This may be mitigated if the pension scheme pays the additional tax.

See: https://www.gov.uk/tax-on-your-private-pension/annual-allowance
https://www.gov.uk/guidance/who-must-pay-the-pensions-annual-allowance-tax-charge
https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/annual-allowance
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm056130

Thanks, so using the figures quoted I would be worse off by not having £8k in my pocket now but better off by having £12k in my AVC after the AA excess has been paid provided I take my AVC as part of my PCLS tax free amount or paid by the pension scheme before tax?

Jeremy535897

On my figures the saving is £4,000, being the £20,000 at (60-40)%. But you pay the £16,000 into the pension scheme that benefits by £20,000. So you personally are actually worse off by £16,000. You can take £5,000 as a tax free lump sum (assuming nothing ever changes) but the rest is taxable normally.