Alpha Civil Service Pension Annual Allowance Calculation Validation

swadhwani

Objective: I want to make the maximum possible contribution towards “Added Pension” while not crossing the annual allowance of £40,000. I could use unused allowances of the last 3 years and would like to calculate my pension input in terms of the Annual Allowance for the current 2022/23 tax year.

Problem: I want to confirm my calculations of pension inputs

Additional Information: I am in the Civil Service Alpha defined benefit pension scheme. Here are some relevant information which I got from my annual benefit statements:

Tax Year	Pensionable earning	Opening Balance	Added during year	Annual Adjustment	Closing Balance
2018-19	£53,464	£2,056	£53,464 x 2.32% = £1,240	£79 (2.4%)	£3,376
2019-20	£39,116	£3,376	£39,116 x 2.32% = £907	£72 (1.7%)	£4,357
2020-21	£58,550	£4,356	£58,550 x 2.32% = £1,358	£28 (0.5%)	£5,744
2021-22	£58,550	£5,743	£58,550 x 2.32% = £1,358	£220 (3.1%)	£7,322

I am seeking guidance on how to calculate the annual allowance for my defined benefit (DB) pension scheme. I understand that obtaining a pension saving statement is the preferred method, but I am concerned that I may not receive it in time due to the approaching deadline for contributing to my Added Pension. As a result, I have attempted to do my own calculations and would appreciate input from experts to ensure their accuracy. Can anyone provide assistance on this matter?

Here’s the calculations 

Tax Year	Pensionable earning	Opening Balance	Added during year (2.32%)	Annual Adjustment (%)	Closing Balance	Annual Allowance (my calculations)	Additional SIPP (outside of civil service)	Tax Relief by SIPP provider	Total SIPP	Total Pension Contribution	Unused Allowance
2017-18			£0	3.0%	£2,056
2018-19	£53,464	£2,056	£1,240	2.4%	£3,375	£20,125	£0	£0	£0	£20,125	£19,875
2019-20	£39,116	£3,375	£907	1.7%	£4,356	£14,389	£0	£0	£0	£14,389	£25,611
2020-21	£58,550	£4,356	£1,358	0.5%	£5,743	£21,006	£4,500	£1,125	£5,625	£26,631	£13,369
2021-22	£58,550	£5,743	£1,358	3.1%	£7,321	£24,796	£6,000	£1,500	£7,500	£32,296	£7,704
2022-23	£58,550	£7,321	£1,358	10.1%	£9,556	£32,129	£0	£0	£0	£32,129	£7,871

swadhwani

Screenshot of calculations as it's difficult to read in the original post 

NedS

Your pensionable earnings are the same for the last 3 years - have you really not received a pay rise in the last 3 years?

Your calculations for 2022/23 look correct to 31/3/2023, but technically you also need to account for the period 1-5th April. You can do this by calculating your pensionable earnings for the 5 day period (5/365 x £58550 = £802.05) and calculate pension accrued as 2.32% = £18.60, multiply by 16 and add to your closing value when calculating the Pension Input Amount, so you need to add ~£300 to your figure of £32,129 to account for those 5 days (this is because your pension statements are until 31st March but the tax year ends on 5th April).

That gets you your usage towards AA for this year. Performing the same calculations for previous years will allow you to see how much unused annual allowance there was in 2019/20, 2020/21 and 2021/22 which is available to you to use this year, but keep in mind you cannot contribute more than your gross earnings of £58,550 (this is your actual gross contributions into Alpha and SIPP)

swadhwani

Thanks for pointing that out. I have recalculated numbers 

• So based on these calculations, the maximum contribution I can make without breaching AA limit is £45,378. However as the contribution can not exceed this year's salary, I can only make a contribution of £25,950 (see calculation below). 
• Thanks for pointing mistake in pensionable earnings. I have fixed that - the only number I am unsure about is for year 2019-20 but have added a number based on my memory. 
• am I correct in taking 10.1% as annual adjustment for this year?

Does the new calculations looks correct? 

NedS

Yes, calculations look right (numbers from my spreadsheet are slightly different to yours, but all within +/- £10 so probably rounding errors and nothing to overly concern yourself with). I have not checked your carry forward. There is a calculator on HMRCs website that will do this for you if you are unsure, but it's not overly complicated and you clearly have carry forward available. How much are you planning on contributing to your SIPP?

Yes, you use 10.1% CPI to uplift the closing balance for this years calculation.

swadhwani

NedS said:

Yes, calculations look right (numbers from my spreadsheet are slightly different to yours, but all within +/- £10 so probably rounding errors and nothing to overly concern yourself with). I have not checked your carry forward. There is a calculator on HMRCs website that will do this for you if you are unsure, but it's not overly complicated and you clearly have carry forward available. How much are you planning on contributing to your SIPP?

Yes, you use 10.1% CPI to uplift the closing balance for this years calculation.

Thanks for checking my calculations. Really appreciate it. So I understand that I can contribute a maximum of £25,950 for either Added Pension or a SIPP. I may not use all that amount and let's say I decide to contribute only £15,000. Can you help me understand tax situation on this. 

• Option 1 (Added Pension) : If I decide to buy Added Pension for £15,000. Will this provide me with tax benefits by reducing my taxable pay by that amount and allowing me to claim the tax back from HMRC (40%) or roughly £6,000? 
• Option 2 (SIPP) : Alternatively, I could put the £15,000 towards a SIPP, which the provider would top up with an additional 25%, and I could claim additional money (as I am a high tax payer) from HMRC. Is this correct?

One challenge I mentioned is how to pay the £15,000 for Added Pension, as my salary in February and March may not be sufficient. I mentioned that paying by cheque is not my preferred method. Do I have any other payment options available to me?

Thank you for your guidance and input on this matter.

Dazed_and_C0nfused

Option 1 - assuming this is a lump sum paid outside of payroll then it effectively works a bit like the Personal Allowance.  The personal tax saving will depend entirely on your overall tax position for the tax year in question but assuming you have minimal other taxable income to the ~£55k taxable pay referred to in this thread you will save some 40% tax but mostly it will be 20%

Option 2 - the gross contribution (£18,750) will increase your basic rate band by from £37,700 to £56,450 so coupled with your Personal Allowance you would avoid paying any 40% tax.  A tax saving probably in the region of £900.

You would also be eligible for Marriage Allowance (as recipient or transferror) and get the full £1,000 savings nil rate band for any taxable interest.

All the above assumes you aren't Scottish resident for tax purposes and have minimal other taxable income.

NedS

All else being equal, option 2 is easier from a tax perspective, which D&C has outlined above.

If you go for option 1, you will have to pay by cheque as it must be a single one-off purchase and a single monthly salary will not cover the contribution. You then have to write to HMRC, explain what you've done and try to reclaim the tax - others report this can be difficult (I recall threads on here from NHS members doing similar), and not a straight forward process as HMRC have a tendency to mistakenly think because it is an employer DB scheme that you would have received relief under net pay arrangements.

Option 2 is simpler because you can choose how and when you pay, split the payments any time between now and the end of the tax year, receive BRT relief (20%) automatically, and write to HMRC claiming any HRT relief that may be due (and should avoid the complications cited above as HMRC will understand the situation contributing to a SIPP).

Of course if you have a strong preference to purchase more Added Alpha pension and are prepared to deal with HMRC for the tax relief, then you may consider that worth the extra inconvenience.

hugheskevi

Remember that the pension input arising from a purchase of Added Pension is based on the amount of Added Pension purchased, not the cost of it - eg, if you contributed £15,000 to purchase £1,500 of Added Pension, the pension input would be £1,500 x 16 = £24,000

swadhwani

hugheskevi said:

Remember that the pension input arising from a purchase of Added Pension is based on the amount of Added Pension purchased, not the cost of it - eg, if you contributed £15,000 to purchase £1,500 of Added Pension, the pension input would be £1,500 x 16 = £24,000

Ah I see so basically this would mean that buying Adding Pension of  £15,000 will increase my annual allowance for this year by £24,000 ( which is still within AA limit for this year so I am good). 

How will that work for tax refund? I will need to call HMRC and ask for tax refund on additional pension contribution of £24,000 ( as I didn’t get any relief). 

Dazed_and_C0nfused

swadhwani said:

hugheskevi said:

Remember that the pension input arising from a purchase of Added Pension is based on the amount of Added Pension purchased, not the cost of it - eg, if you contributed £15,000 to purchase £1,500 of Added Pension, the pension input would be £1,500 x 16 = £24,000

Ah I see so basically this would mean that buying Adding Pension of  £15,000 will increase my annual allowance for this year by £24,000 ( which is still within AA limit for this year so I am good). 

How will that work for tax refund? I will need to call HMRC and ask for tax refund on additional pension contribution of £24,000 ( as I didn’t get any relief). 

You are mixing up the contribution (£15,000) and pension input amount for annual allowance purposes (£24,000).

You can only get tax relief on the contribution of £15,000, not £24,000.

Assuming this is a gross payment to buy additional DB pension then you would have to contact HMRC, making it clear the type of contribution you have made and that it received no tax relief at the point you paid it. 

It's also probably worth pointing out that it isn't a relief at source contribution as they probably account for 99% of any pension relief claims HMRC have to deal with and HMRC seem to struggle with the type of contribution you are planning on making!