Help I have overpaid into my pension above the AA
in Pensions, annuities & retirement planning
6 replies 461 views
I am a high earner and subject to full tapering of my AA so have the minimum 4K tax free allowance for pension savings. I have contributed a total of 34K via salary sacrifice in the last tax year, all of which are classed as employer contributions. I have carry over from a previous year of 5.2K, so will have to pay tax at my marginal rate on 24.8K. I calculate the tax to be around 11K. My question is do I have to pay this myself or can I use "scheme pay" to pay this. I believe there is a limitation that you have to have used the full 40K allowance before you can use scheme pay but my allowance is not 40K its 4K and I have contributed 34K total (so less than 40K). Would really appreciate any help/advice that can be provided as to whether I can use scheme pay or not. Thank you
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Using your numbers, you have paid £34k into a pension, but after tax (scheme pays) this reduces to £23k. On withdrawal, assuming you are below the LTA but (likely) in the 40% tax bracket, you will get 25% of that back tax free, and pay 40% on the remainder, for a return of £16.1k on your original £34k. An effective 53% tax rate. Compare to your current 45% + 2%NI marginal rate. And the effective tax rate is even higher if you cannot use scheme pays. Less awful if you think you can duck inside 20% tax on withdrawal (that would depend on other income, unsheltered investments, and so on). But, worse if repeated next year and you've exhausted carry-over.
You might take this up with your employer. They are using what is for you one of the least tax-efficient ways to provide this part of your compensation package. Given enough motivation, some employers will budge and swap pension match for plain salary. My own ex-employer offered a much lower match but would not shift, even after I reasoned with them at length, using real maths and algebra, across multiple departments and levels of management (which is part of the reason why they're now my ex-employer!).