Impact on tax credits in exceeding Pension Annual Allowance?

Pat38493

londonderry said:

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!

No I think you are still misunderstanding this - there are 2 separate limits with both apply at the same time:

- The 40K absolute limit (soon to be 60K)
- The tax relief limit which is limited to the amount you actually earned from that year.

What Zagles is saying is that if the total contributions to the pension in this tax year exceeded the amount of income you earned from paid employment, you need to contact your pension provider to notify then and probably they will issue you a refund of the difference.

justwhat

billy2shots 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.

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).

Pension is fair game. just contribute 100%(or less) earnings to pension, stay below thresholds and you get UC/ tax credits.  You may even get an increase in benefits. 

Savings are an issue with UC but not with Tax credits.

i put just under 12k in pension and still retain approx 3k in tax credits. next tax year will be the same.

Its probably very common.

michaels

Fidelity do not support non-grossed up contributions anymore.  I have heard that II do support this but have not confirmed this personally.

In the past I have paid back the fidelity grossing up via a tax return having exceed the 3600 rather than the AA but not sure if this was done 'correctly' rather than declaring it as an AA charge.

Marcon

Pat38493 said:

londonderry said:

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!

No I think you are still misunderstanding this - there are 2 separate limits with both apply at the same time:

- The 40K absolute limit (soon to be 60K)
- The tax relief limit which is limited to the amount you actually earned from that year.

Member contributions

There’s no limit on the amount that an individual can contribute to a registered pension scheme. If you’re a UK resident aged under 75 you may receive tax relief on your contributions to registered pension schemes.

Tax relief is limited to relief on contributions up to the higher of:

• 100% of your UK taxable earnings
• £3,600

Source: https://www.gov.uk/government/publications/rates-and-allowances-pension-schemes/pension-schemes-rates#annual-allowance

michaels

Obviously on draw-down 75% of contributions becomes taxable income so probably not worth making contributions that will not get grossed up if you will be a tax payer on draw-down (which is probably most with a full state pension who do not draw-down the full pot prior to SPA.

zagfles

londonderry said:

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!

I don't understand why you ever thought you'd need to declare a pension contribution as income? But tax credits aren't your problem here. If your earnings are £20k and you want to put £40k into a SIPP you must tell the SIPP provider, otherwise they'll be claiming tax relief you're not entitled to as you've exceeded the tax relief limit.

If you don't, HMRC will eventually catch up when they correlate your earnings with tax relief claimed and it'll cause all sorts of hassle. If you knowingly do it it could be seen as fraud.

But as above, most SIPP providers won't accept contributions that exceed the tax relief limit, probably because it's too much hassle and usually a bad idea to make non-relievable contributions when you'll usually pay tax when you withdraw it. The whole point of pensions is you get tax deferment, relief on the way in and taxed on the way out. Why do you want to put money into a pension without tax relief on the way in and create a tax liability on the way out?

zagfles

michaels said:

Fidelity do not support non-grossed up contributions anymore.  I have heard that II do support this but have not confirmed this personally.

In the past I have paid back the fidelity grossing up via a tax return having exceed the 3600 rather than the AA but not sure if this was done 'correctly' rather than declaring it as an AA charge.

It's definitely not correct to declare it as an AA charge because you've not exceeded the AA. Exceeding the tax relief limit is totally different. Did you just enter the pension cont in the RAS contribution box? They probably work it out automatically if the RAS contributions exceed your earned income.

michaels

zagfles said:

michaels said:

Fidelity do not support non-grossed up contributions anymore.  I have heard that II do support this but have not confirmed this personally.

In the past I have paid back the fidelity grossing up via a tax return having exceed the 3600 rather than the AA but not sure if this was done 'correctly' rather than declaring it as an AA charge.

It's definitely not correct to declare it as an AA charge because you've not exceeded the AA. Exceeding the tax relief limit is totally different. Did you just enter the pension cont in the RAS contribution box? They probably work it out automatically if the RAS contributions exceed your earned income.

I'll have to reopen the return to check.  It happened because Fidelity who previously removed the relief if asked decided they no longer do this.