Pension Annual Allowance/Salary Sacrifice - have i made a mistake? 15 March at 8:02AM in Pensions, annuities & retirement planning 9 replies 265 views

Stingy_Samson

Hi all, i'm hoping someone can clarify whether i have done the right thing this last tax year. 

To round things up to make it easier, let's say my workplace salary is £50,000, i decided to increase my salary sacrifice in 2022/23 to 50%. My employers also contribute 5% in my pension. 
So over the year, my pension contributions would be £25,000 (from my salary) and £2,500 top up from my employers. 
I wanted to try and maximise my current £40,000 allowance, so i thought it i could deposit £10,000 (and my pension portal automatically added the 25% tax relief) - so an additional £12,500 goes into my pension. 
So this took me to the £40,000 figure.

I didn't think there would be an issue with wanting to contribute the additional money to get to £40,000 in total because my salary is £50,000. BUT my taxable salary after salary sacrifice is actually only £25,000. 

Have i boobed? And was i wrong in assuming i could make additional contributions to the pension to get me nearer the £40,000 limit?   

MK62

Why do think there's a problem with what you've done?

Your personal contribution is £12500.......you employer contributed the other £27500, so you shouldn't have breached the Annual Allowance of £40000, and you shouldn't have breached the "up to 100% of qualifying earnings" rule either.

Dazed_and_C0nfused

Annual allowance isn't my area of expertise but I think you're ok.

Your taxable earnings are £25,000 and you have only contributed £12,500. 
NB.  The tax relief rate is 20%.  Although they add 25% of your (net) contribution that equates to 20% of the gross contribution.

But you have misunderstood one thing.  

Salary sacrifice means you didn't contribute anything from your pay, you agreed to a lower salary in return for additional employer contributions.  That's why no tax relief was added to those contributions.

So over the year, my pension contributions would be £25,000 (from my salary) and £2,500 top up from my employers. 

Troxy

What’s the worry? It looks like you’re fine, your employer has contributed £27.5k and you £12.5k gross out of your now salary of £25k

lisyloo

No you haven't boobed on the annual allowance.
Whether you can claim tax relief on £40K when you only pay it on £37,430 is the question (that's 50k - 12570).

Dazed_and_C0nfused

lisyloo said:

No you haven't boobed on the annual allowance.
Whether you can claim tax relief on £40K when you only pay it on £37,430 is the question (that's 50k - 12570).

But (pension) tax relief has only been claimed on the gross contribution of £12,500.

No tax relief has been given on the £25,000 as they are employer contributions.  The op has effectively completely avoided the income tax and pension tax relief systems by giving up half their salary.

Stingy_Samson

Ok many thanks for all the replies. I initially thought i was perfectly ok with what i did, but then i had a realisation that because my taxable salary is now only £25,000, then THAT would be my limit of the total amount going into the pension this tax year. (i.e - my £10,000 additional contribution i made through Aegon should NOT have had the additional £2,500 tax relief automatically added, therefore i would have ended up having to pay that back next year). 

I'll sit safe for now :-)

cloud_dog

@Stingy_Samson the thing to understand is that under Salary Sacrifice all contributions are employer contributions, and you still have your total pensionable earnings should you (as an individual) wish to make additional contributions.  Some limits still do apply so always best to double check.

Stingy_Samson

cloud_dog said:

@Stingy_Samson the thing to understand is that under Salary Sacrifice all contributions are employer contributions, and you still have your total pensionable earnings should you (as an individual) wish to make additional contributions.  Some limits still do apply so always best to double check.

Yeah, i get the concept now. Thanks for that clarification. :-)

Albermarle

lisyloo said:

No you haven't boobed on the annual allowance.
Whether you can claim tax relief on £40K when you only pay it on £37,430 is the question (that's 50k - 12570).

The calculation of how much tax relief you are allowed and how much tax you actually pay are unrelated.
Tax relief is based on your gross pay only.

That is why someone earning only say £10K pa can add £8K  to a pension which will be grossed up to £10K as HMRC will add £2K tax relief, even though the person will not have actually paid any tax.