MPPA

brucieboy

just a,general question about MPPA

I've aleasdy taken 25% tax free out of my SIPP

currently I put in 7% and my employer adds 11% to a separate company SIPP pension

If I were to draw a,steady income from my  SIPP,I would then activate the MPPA

Q1,what amounts would I then pay tax on,with regard to paying in to the work pension

I know I will have to pay tax on the drawdowns and will be classed as income 

Would the 11% contributions,ie more or less tripling my payment,be worth the risk of not being able to pay more than £4k a,year in ?

I currently pay (with employer contributions) £4.5k a,year ,so not a lot of difference a year down to £4k

ader42

The £4k limit includes the Tax Relief, i.e. it is the gross amount.

So the net limit that you can contribute is £3,200 to which £800 Tax Relief is added making £4k.

The triggered Tax Charge should more or less equate to the invalidly added Tax Relief.

Free money from your employer is still worth having even without the Tax Relief that you will have to pay back via the Tax Charge; in my opinion.

Not sure where you get “tripling” from though… 

I take it you earn £25k, your 7% is £1750 (plus £438 tax relief) and the 11% is £2750 (plus £687 tax relief)?
You currently get £1125 Tax Relief added.

If I’m correct and the MPAA is triggered you will pay in £3200 which gets £800 tax relief added. The additional £1,300 should not get tax relief so to claw that back you should expect a Tax Charge around £325 from HMRC.

So that’s how much you “lose” each year from triggering the MPAA - that’s my take on it anyway.

I’m not sure how the Tax Charge gets paid, is it taken from the pension or is a tax bill sent to the pension holder?

brucieboy

Thanks for that info....so if I'm reading this right,I can still pay more than  the £4k,but anything over that  wouldn't get the tax relief?

Or is it, once you trigger the MPPA,do you pay the charge and still  limited to £4k

I'm thinking a rough charge of £325,would be offset by what my company pays. ... my 7% & their 11% in,so better to pay extra in ,and suffer the charge....sounds complicated...!!

Albermarle

My understanding is that the £4K limit includes employer contributions. It is a max limit of all DC contributions together. Although it can still be advantageous to have them and pay a tax charge . See this old thread.
MPAA - Tax relief included? — MoneySavingExpert Forum

ader42

Yes the MPAA exists to prevent Tax Relief over a set threshold.

So yes if you put in more than £3200 the scheme will often add the Tax Relief which will then result in a Tax Charge to claim it back.

In my head I would picture it as only getting 10.5% Tax Relief on your employer contributions instead of 20% ( as £687 - £325 = £362). 

It would be nice if the Tax Charge was taken from the pension as you wouldn’t need to think about it.

But as I said I don’t know if that’s the case or if HMRC will send you the Tax Charge, which would mean you paying it out of your net earnings. If the latter then I guess you have a choice of just paying the Tax Charge and accepting that it’s just actually putting more money into your pension, or reducing your pension payments to say 6%