Impact on tax credits in exceeding Pension Annual Allowance?

londonderry

Total newbie to finance. Could someone confirm if I'm understanding the rules correctly. If you decide to invest in a Private Pension (SIPP) from a bank account savings and you exceed your Pension Annual Allowance, you then have to claim the exceeded amount as income on your tax return, yes? So if you are receiving tax credits, you're now going to have to call HRMC and potentially lose all your tax credits for the year because you decided to invest in a pension for your future? I think that's correct, but just wanted someone else to confirm that I'm not missing something. Thanks. p.s. I don't have any additional pension allowance for previous years, so that's not an option. 

Marcon

If you exceed the annual allowance, two things happen: you don't get tax relief on the amount by which you exceed the AA, and you get an addition to your tax bill to correct any tax relief you have (wrongly) been granted.

Out of curiosity I just tried plugging some numbers in to the government's tax credits calculator (https://www.gov.uk/tax-credits-calculator) with a hypothetical salary of £50,000 and gross personal contributions to a pension scheme of £45,000 - and the answer didn't equate to 'losing all your tax credits for the year'. 

Unless someone here knows the answer definitively (mine was definitely exploratory!), I think you might need to talk to someone with particular knowledge of tax credits rather than pensions e.g. https://www.entitledto.co.uk/

londonderry

Apologies if I'm being dense here. Is it possible to invest the money into a pension (SIPP)  without getting tax relief in the first place, and would that help at all in terms of not having to claim the amount you are contributing to your pension as "income" and having it impact any income based benefits? Thanks again.

penners324

No, the SIPP provider claims the tax relief when you transfer money to it.

I'd hope the system is robust enough so that anyone paying £40k to £60k a year into pension doesn't qualify for tax credits.

billy2shots

penners324 said:

No, the SIPP provider claims the tax relief when you transfer money to it.

I'd hope the system is robust enough so that anyone paying £40k to £60k a year into pension doesn't qualify for tax credits.

Unfortunately it doesn't look that way. 

On another platform there is a long thread very similar to this. The person making massive investments whilst collecting benefits at the same time. 

Most contributers were mortally against it however the OP is adamant that it's fair game due to current rules. 

I believe it involves not having certain amounts in savings for you or your partner depending on who is applying (basically chucking it all towards the mortgage or your pension).

londonderry

penners324 said:

No, the SIPP provider claims the tax relief when you transfer money to it.

I'd hope the system is robust enough so that anyone paying £40k to £60k a year into pension doesn't qualify for tax credits.

Thanks. I'm not talking about anything near £40k to £60k a year. The £40k Pension Annual Allowance only applies if you are making that sort of money in the first place. It's £40k or your yearly annual earnings, whichever is less, and in my case it's "less." 

zagfles

londonderry said:

penners324 said:

No, the SIPP provider claims the tax relief when you transfer money to it.

I'd hope the system is robust enough so that anyone paying £40k to £60k a year into pension doesn't qualify for tax credits.

Thanks. I'm not talking about anything near £40k to £60k a year. The £40k Pension Annual Allowance only applies if you are making that sort of money in the first place. It's £40k or your yearly annual earnings, whichever is less, and in my case it's "less." 

No, you have misunderstood. The annual allowance is £40k for everyone (£60k next year), except very high earners (£240k+) and those who've triggered the MPAA.

There's also the tax relief limit, which is £3600 or 100% of earnings. This is a separate limit NOTHING TO DO WITH THE ANNUAL ALLOWANCE.

If you want to exceed the tax relief limit you can legally, you must tell the SIPP provider not to claim tax relief on the excess. But in practice most/all SIPP providers won't accept contributions on this basis, it'll be against their terms. If you accidently exceed it you can get a refund after the end of the tax year. You DO NOT declare on your tax return that you've exceeded the annual allowance, because you haven't, you've exceeded the tax relief limit.

For tax credits, relievable pension contributions can be deducted from your income, not sure about non relievable but worst case is they just ignore any non-relievable contributions. So why do you think you'll lose them?

You say you're a newbie to finance, so why are you are jumping in the deep end and exceeding limits when that's usually a bad idea? I think you need to understand the basics first.

zagfles

penners324 said:

No, the SIPP provider claims the tax relief when you transfer money to it.

I'd hope the system is robust enough so that anyone paying £40k to £60k a year into pension doesn't qualify for tax credits.

It's a well known loophole that's existed since the original "pension freedoms" in 2006, it was even worse in the early days when the AA was £250k+ so almost anyone could pay all/most of their earnings into a pension and get tax credits. There are no capital rules with tax credits so if you had savings you could live off them.

UC which is replacing tax credits still has 100% pension deductions, but it does at least have capital rules.

Pat38493

zagfles said:

penners324 said:

No, the SIPP provider claims the tax relief when you transfer money to it.

I'd hope the system is robust enough so that anyone paying £40k to £60k a year into pension doesn't qualify for tax credits.

It's a well known loophole that's existed since the original "pension freedoms" in 2006, it was even worse in the early days when the AA was £250k+ so almost anyone could pay all/most of their earnings into a pension and get tax credits. There are no capital rules with tax credits so if you had savings you could live off them.

UC which is replacing tax credits still has 100% pension deductions, but it does at least have capital rules.

Huh?  So if I stopped working and start to live of DC pension pots in small chunks, I can legally claim UC?

zagfles

Pat38493 said:

zagfles said:

penners324 said:

No, the SIPP provider claims the tax relief when you transfer money to it.

I'd hope the system is robust enough so that anyone paying £40k to £60k a year into pension doesn't qualify for tax credits.

It's a well known loophole that's existed since the original "pension freedoms" in 2006, it was even worse in the early days when the AA was £250k+ so almost anyone could pay all/most of their earnings into a pension and get tax credits. There are no capital rules with tax credits so if you had savings you could live off them.

UC which is replacing tax credits still has 100% pension deductions, but it does at least have capital rules.

Huh?  So if I stopped working and start to live of DC pension pots in small chunks, I can legally claim UC?

UC has conditionality, it replaced JSA etc as well as tax credits. So you'd likely need to show you're looking for work.

londonderry

zagfles said:

londonderry said:

penners324 said:

No, the SIPP provider claims the tax relief when you transfer money to it.

I'd hope the system is robust enough so that anyone paying £40k to £60k a year into pension doesn't qualify for tax credits.

Thanks. I'm not talking about anything near £40k to £60k a year. The £40k Pension Annual Allowance only applies if you are making that sort of money in the first place. It's £40k or your yearly annual earnings, whichever is less, and in my case it's "less." 

No, you have misunderstood. The annual allowance is £40k for everyone (£60k next year), except very high earners (£240k+) and those who've triggered the MPAA.

There's also the tax relief limit, which is £3600 or 100% of earnings. This is a separate limit NOTHING TO DO WITH THE ANNUAL ALLOWANCE.

If you want to exceed the tax relief limit you can legally, you must tell the SIPP provider not to claim tax relief on the excess. But in practice most/all SIPP providers won't accept contributions on this basis, it'll be against their terms. If you accidently exceed it you can get a refund after the end of the tax year. You DO NOT declare on your tax return that you've exceeded the annual allowance, because you haven't, you've exceeded the tax relief limit.

For tax credits, relievable pension contributions can be deducted from your income, not sure about non relievable but worst case is they just ignore any non-relievable contributions. So why do you think you'll lose them?

You say you're a newbie to finance, so why are you are jumping in the deep end and exceeding limits when that's usually a bad idea? I think you need to understand the basics first.

Thank you for explaining that.  I did misunderstand badly and it's beginning to make more sense. So basically, even if I'm making £20k, I'm allowed to put up to £40k into a SIPP this year, and it wouldn't count as "income", so as long as I stay below that £40k limit? That would then mean that I don't need to declare these banks savings transferred into a pension as income, and it shouldn't impact tax credits? Thanks again for the help!