Exceeding pension allowance and self assessment

Pat38493

ali_bear said:

I think that has happened to me - for the last several years I have been opting to bung my annual bonus into the company pension via salary sacrifice and I need to check but I almost certainly exceeded the 40k limit.
I don't do self assessment tax returns, I have what the HMRC call a personal tax account and their calculations are very much a behind-the-curtains business. I was wondering why my personal allowance had been docked and this probably explains it. I just wish HMRC were more transparent about my tax calculation. 

You might be confusing 2 different things.

Normally your personal allowance gets reduced if your taxable income exceeded £100K - you will then lose £1 of personal allowance for each £2 earned.  This effectively means that your marginal tax rate is 60% on that income between £100K and about £120K.

If your income is in that kind of range, you can avoid the 60% “tax trap” by putting everything into your pension but if you run out of 40K allowance (with or without rollover) you have to make a choice to pay the tax based on exceeding the AA or just not paying into the pension at all.

What I am not sure about is if you exceed the AA, does this mean that you will only be taxed 40% on that money and you won’t lose your personal allowance, so you are actually better off?  I think this question was asked before and the answer was yes but I’m not 100% sure about it.

ali_bear

Gaaa! Its even more complex than I thought 
Thanks I will check - unfortunately the HMRC are very opaque about my calculation, plus they are (these days) heroically slow. 

Pat38493

ali_bear said:

Gaaa! Its even more complex than I thought 
Thanks I will check - unfortunately the HMRC are very opaque about my calculation, plus they are (these days) heroically slow. 

Yes but this is also where your personal situation and how you want to draw the money our in retirement comes into play.

Looking at the gov.uk web site, it does seem to clarify that if you have overpaid your AA, you need to fill out a self assessement tax return and you need to complete the specific boxes for this purpose in form SA101, and you can still claim tax relief on the contributions.

So, you do avoid the 60% tax on the way in.  However, you probably will end up paying more than 40% but maybe not the full 60% in the end as you will likely pay some income tax on that money on the way out as well.  However if you are 20% taxpayer in retirement and you have 25% tax free cash, there will still be a small gain rather than paying 60%.  Downside is that you are locking up that money till 55 at least.

Bottom line in any case is that if you have breached your annual allowance (after accounting for any rollover that you have available), you need to tell HMRC that you are required to fill in a tax return.  If you don’t, they will probably catch up with you eventually after some years (and possibly fine you for not reporting it at the time).

This is the case even if the pension company paid the tax on your behalf (according to the gove.uk web site) as you still have to report it.

ali_bear

Right thank you. Caveat prole and all that. 

ali_bear

Hmm checked my contributions record and I've only exceeded the annual limit this year. Going back over the last 4 years I have rollover allowance to cover this year and some next year if needed. 
I'll have to check what HMRC are up to again - and yes I'll do the SA thing. 

zagfles

roadweary said:

Hi,

My company pension uses the salary sacrifice mechanism.  By this April, I will have exceeded my 40k max allowable total pension contributions for the year.  However, that is offset by the unused pension allowance in the previous 3 financial years.  I do fill in a self assessment form every year but didn't notice anything covering this scenario.

I can demonstrate through my annual pension statements that there should be no tax payable for exceeding the pension contributitions for this year.

I've read this https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm055200 but what I couldn't see was whether I need to declare this situation in any way.  Or whether simply knowing the rules and having proof of my previous 3 FY pension contributions is sufficient?

Thanks,
R

You don't need to declare anything, it's on another page in the same section of the PTM:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm056200

"An individual does not need to tell HMRC about their pension savings (total pension input amount) for a tax year if they are:

• below the annual allowance for the tax year, or
• above the annual allowance but they have unused annual allowance carried forward to the current tax year and this means that no annual allowance charge is due for the tax year."

zagfles

roadweary said:

Another thing I found confusing was this..... Imagine, I had the following contribution levels:

FYE 2022      41,000
FYE 2021       35,000
FYE2020         32,000
all other years hugely under the limit.

I assumed that I'd have 12k additional I could invest in FYE2023.  8k spare from 2020, 5k spare from 2021, but remove 1k over from 2022.  My pension (but not tax) adviser has said it's actually 13k as it comes from the earliest years first.

Is that correct?

Yes, provided you were a pension scheme member in FYE2019. You can use an AA calculator eg: https://www.hl.co.uk/pensions/contributions/carry-forward-rule/annual-allowance-calculator

michaels

If you do go over it makes sense to use 'scheme pays' for the tax charge if at all possible as his then comes out of untaxed income whereas if you pay HMRC direct it comes out of taxed income.

Workerbee999

michaels said:

If you do go over it makes sense to use 'scheme pays' for the tax charge if at all possible as his then comes out of untaxed income whereas if you pay HMRC direct it comes out of taxed income.

Hello. Please can you clarify why it is better to use scheme pays if possible? My OH had an AA tax charge last year which we paid in cash as people around us were all saying it was best to do that if we had the money - to do with the interest it would be accruing until he takes his pension in approx 10 years, and the impact it would have on his DB pension by reducing it. Is it maybe different when a DB is involved?

If scheme pays is better, can it be paid out of a SSIP when both have been contributed into this year but it’s the DB PIA which looks like he is going to tip over this year as well (and this came to light when we got the FY22 statement after already having contributed to the SSIP this year). SSIP is with Hargreaves if that makes any difference.

thanks

pantaiema

I have workplace pension which I understand I have contributed to a maximum. Also I add and AVC. I also have contributed to my SIIP. I could easily see how much I add into my SIIP from my Vanguard account. But I can trace how much I could add more to benefit maximum tax free contribution of £40,000. Is there anyway to find that out? The person responsible for work pension contribution is not very helpful. Any idea how to get that information is it possible to ask HMRC the remaining contribution I could add in my SIIP in this tax year? Thanks