Help I have overpaid into my pension above the AA 10 February at 3:48AM in Pensions, annuities & retirement planning 6 replies 461 views

Clare_Grace

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

hugheskevi

You are not eligible to use mandatory scheme pays, but your scheme provider may permit the use of voluntary scheme pays to meet the charge - the scheme does not have to offer voluntary scheme pays though, so you would need to ask them their policy on the use of voluntary scheme pays.

EdSwippet

Clare_Grace said:

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.

Aside from the issue of whether or not you can use 'scheme pays' (and in general you should if at all possible, since paying tax from untaxed money gives a better result than paying tax out of post-tax money), based on your numbers it's probably worthwhile comparing pension contributions against simple higher salary, to see if taking salary instead (where possible) is just better. Remember that whatever remains in your pension after you have paid tax on over-contributions at your marginal rate is again subject to tax on withdrawal, so double-tax.

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. 

michaels

EdSwippet said:

Clare_Grace said:

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.

Aside from the issue of whether or not you can use 'scheme pays' (and in general you should if at all possible, since paying tax from untaxed money gives a better result than paying tax out of post-tax money), based on your numbers it's probably worthwhile comparing pension contributions against simple higher salary, to see if taking salary instead (where possible) is just better. Remember that whatever remains in your pension after you have paid tax on over-contributions at your marginal rate is again subject to tax on withdrawal, so double-tax.

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. 

If it is employer contribution might there be no option to take as salary instead so it is 16k or nothing?

Clare_Grace

Thank you to all for responding I will see if I can get a discretionary "scheme pay" and then will reduce all contributions to zero for the remainder of this year and be much more careful next year.  Its incredibly frustrating as my employer has a excellent match scheme so for every 5% I pay, they match with 10% to total 15%.  However, this just means I will loose this benefit almost completely as the responders have said, there is no point paying anything above 4,000 in as I will just be double taxed on it (taxed on the way in and taxed on the way out) I am better taking my 5% as salary and putting it into an ISA I think.

michaels

Dunno - 5% taxed at 47% sounds a lot less than 15% taxed at 53%, indeed, even if you can't use scheme pays I suspect you are still better off with the employer contributions.

EdSwippet

Clare_Grace said:

Its incredibly frustrating as my employer has a excellent match scheme so for every 5% I pay, they match with 10% to total 15%.  However, this just means I will loose this benefit almost completely ...

As noted above, at this level of match, which is pretty generous in comparison with averages, you may well still better off making pension contributions. It's not exactly highly motivating though, is it?

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!).