Tax relief for additional contributions into the TPS defined-benefit? Charges above allowance?

SouthLondonUser

The forum already helped me big time with a similar question about 3 years ago:

https://forums.moneysavingexpert.com/discussion/6079857/how-to-calculate-tax-relief-when-buying-additional-pension-in-a-defined-benefit-scheme/p1

I would like to check what, if anything, has changed in the meanwhile, and if I understand the rules correctly.

A relative asked for my help because she might move from an employer which is in the Teachers Pension Scheme to one which is in the University Superannuation Scheme.

There is no doubt that the TPS is much better - a recent discussion on that was https://forums.moneysavingexpert.com/discussion/6439958/uss-vs-tps-university-pension-advice-needed

If she does move, she will want to buy as much additional pension into the TPS as she can before changing employer. So the questions are:

• what is the maximum additional TPS pension she can buy, as a lump sum, this tax year, and still get tax relief on it? This is a function of her earnings and of the annual pension allowance, which from this year goes up to £60k?
  
• if she buys more, how does the tax relief work?

With a practical example:

1. Let's say that she earns £ 52,570 and her taxable income, after the £12,570 personal allowance, is £40,000
2. So the maximum she can contribute into a pension, and still get tax relief on, is £40,000, right?
3. She can contribute more but she won't get tax relief on the extra amounts.
4. So if she contributes £ 40k she gets tax relief on £40k. If she contributes £60, she gets tax relief on the first £40k only.
5. What if, hypothetically, she contributes £ 70k? This would be £10k more than the £60k pension allowance. She would have to pay tax at her marginal rate (20%) on the extra £10k?
   
6. The maximum additional TPS pension she can buy this tax year is £40,000 less all the contributions made by her employer(s) in this tax year, right?
7. Does HMRC still value the increase in defined benefit pensions with the 16x rule (or whatever the correct term is)? E.g. if her defined benefits were worth £,4000 at the end of the 2022-23 tax year, and worth £ 5,000 at the end of the current ( 2023-24 ) tax year, then HMRC considers that £ 16k (=£1k increase x 16) have been used, and £ 60k - £ 16k = £44k remain?

Thanks a lot!

PS I should also add that additional pension amounts bought into the TPS cannot be bought via salary sacrifice. First you pay, then you contact HMRC, then, maaany months later, HMRC sends you a check to reimburse you the tax (but not the national insurance)

Dazed_and_C0nfused

1.  Her taxable income is £52,570 not £40,000.  £40,000 is the amount of taxable income on which she will likely pay some tax.

2.  No.

3.  What figures are you thinking of?

4.  Assuming the £40k is a lump sum contribution with no tax relief at the time of payment then it works like the Personal Allowance so the exact amount of tax relief depends on her other taxable income and overall tax position.  She doesn't a fixed amount like with RAS contributions.

6.  I thought the maximum you can buy was now £8,000 

https://www.teacherspensions.co.uk/members/resources/forms/updates.aspx

SouthLondonUser

@Dazed_and_C0nfused , thank you for getting back to me!

Yes, you can buy up to £ 8,000 of additional pension, but that costs you between 9 and 12 times, depending on age and other details. there's a calculator here: https://www.teacherspensions.co.uk/members/calculators/flexibilities.aspx

Let's say it costs 10x, for the sake of an example.

She was thinking of putting in an amount between £30k and £50k. This would buy her between £3k and £5k of additional pension. She's thinking of doing it now, because, if she does change job, this will no longer be an option in a few months.

1. If she puts a low amount, let's say £10k to buy £1k, then she won't breach the £60k annual pension allowance AND she will get tax relief - because tax relief on these payments is not at source but can only come later
2. There is another threshold where she doesn't breach the pension allowance, but she won't get tax relief on all her contributions because some of those contributions are above the £40k on which she pays taxes
3. And there is yet another, higher threshold beyond which, in addition to the point above, she also breaches the £60k annual pension allowance so she must pay an extra tax charge.

Is this interpretation correct? If so, how do we calculate these 2 thresholds? With the 16x rule?

Thanks!

Dazed_and_C0nfused

1.  Not my area of expertise but I'm not sure the contribution amount is relevant for Annual Allowance purposes, that is normally the PIA value for DB schemes.  And you don't look at that on isolation, she would have to calculate the total PIA plus the gross amount of any DC contributions.

2.  They are either eligible for tax relief or not.  But with this type of pension contribution the amount of tax relief is limited by the tax you would otherwise pay.  There have been previous posters who have misunderstood this and paid £10k, which was eligible for tax relief purposes, when only paying say £200 in tax and were somewhat disappointed when they got £200 back not the £2,000 they were expecting.

Basically I think you are mixing up two completely separate limits.

There is the annual allowance, now £60k (plus unused allowance available from previous years).

And there is the limit for tax relief purposes.  If her P60 is going to show taxable earnings of £52,570 (and that is her only earned income for pension contribution purposes) then that is the limit for tax relief purposes. 

SouthLondonUser

Sorry, I was probably unclear.

I don't  think I am mixing up 1) the annual allowance and 2) the limit for tax relief purposes. I know they are two separate things, but they are both applicable, and I want to understand exactly how both work.

The limit for tax relief is easier to understand: her tax relief is limited by the amount of tax she would otherwise pay.

It's the annual allowance which is trickier to understand for defined-benefit. For defined-contributions, it's easier: if you and your employer have put in, say, £20k, then you can contribute up to £40k, and anything above that gets taxed at your marginal tax rate.

But for the defined-benefit? Is it still the rule of 16x (or whatever the proper term is)? Ie if this tax year your defined benefits have increased by £1,000, then this counts as £16k from your £60k annual allowance?

Dazed_and_C0nfused

The limit for tax relief is easier to understand: her tax relief is limited by the amount of tax she would otherwise pay.

Only for some types of contributions.  This doesn't apply with RAS contributions, lots of non taxpayers happily pocket £720 each year 😉.

It's way more complicated than simply 16x the increase in pension value.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm053000

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm053301

SouthLondonUser

Wow, what a mess! Anyway, thanks a lot for all the details, now I'll go through the rules. So, As far as you know, the coefficient is still 16x, even if rates have gone up so much in the last couple of years?

Universidad

SouthLondonUser said:

But for the defined-benefit? Is it still the rule of 16x (or whatever the proper term is)? Ie if this tax year your defined benefits have increased by £1,000, then this counts as £16k from your £60k annual allowance?

Slightly more complicated than that because you have to factor in the inflationary increase as well, but x16 is a good rule of thumb as long as you're not too close to the line. Current levels of inflation have made that less close to the mark than it used to be...

There's a calculator here: https://www.tax.service.gov.uk/pension-annual-allowance-calculator

You'll need to know what the inflationary increases have been in the scheme in each year.

SouthLondonUser said:

The maximum additional TPS pension she can buy this tax year is £40,000 less all the contributions made by her employer(s) in this tax year, right?

1. You can contribute up to 100% of salary. So she could put in a total of 52,570 (including the regular contributions).

2. Tax relief only applies to tax you've paid in the same tax year, when buying Added DB pension by lump sum. This is NOT the case for relief at source contributions, as discussed, but this isn't one of them. So you won't get more tax relief than tax paid, not that you were trying to do that.

3. There's ALSO no tax relief once you breach the annual allowance, the calculation for which is complex, but essentially amounts to adding more than about 3300 pounds worth of annual DB pension. I don't know what you need to put in to buy 3300 of pension in TPS, but paying a lump sum of 40,000 would probably breach the AA in most cases that I've seen. However, you can carry forward unused allowance for 3 years, so if your wife hasn't been close to the AA last year or the year before, then this is unlikely to be an issue. For TPS the current limit on what you can buy with a lump sum is 8000 worth of annual pension, which would almost certainly breach the AA twice, but the amount you'd need to pay in would be way more than your wife's salary anyway, so the TPS "limit" on added pension is pretty theoretical for you.

The other thing to note is that you won't get tax back on a lump sum automatically.

It's not a net pay arrangement because it's not coming out of your salary, it's coming out of your savings. And it's not given relief at source, i.e. the government doesn't top it up by the basic tax rate.

Your wife will be entitled to tax back on the lump sum that you've paid in, but will have to claim it.

And that can be complicated - see these threads for information on that:

https://forums.moneysavingexpert.com/discussion/4043989/please-help-with-nhs-pension-purchase-and-tax-relief/p1

and

https://forums.moneysavingexpert.com/discussion/6194603/tax-relief-for-buying-nhs-additional-pension-and-paying-lump-sum/p1

SouthLondonUser

@Universidad: you mention that "You can contribute up to 100% of salary. So she could put in a total of 52,570 (including the regular contributions)." What if you put more than that? Already if she puts more than £40k (including regular contributions)  she won't get tax relief, as she would only pay tax on £40k. So is there a difference if she pays more than her salary? As you said, buying additional pension comes from savings, not salary.

As for tax relief: the person in question has already bought additional pension into the TPS in the past. So far she has sent a letter to HMRC (HMRC requested a letter, they said it couldn't  be done online or over the phone), and then they sent her a cheque after 4 months or so. She did not have to pay an accountant, nor to file a self-assessment. It probably helped that in the letter she made it very, very clear that there was no relief at source, that she realises this is rare but she had quintuple-checked it with her HR and with the TPS

cobson

This is a useful section to point out to HMRC when making these claims, especially if you are a basic rate taxpayer and they try to say that only higher rate taxpayers can claim:

PTM044240 - Contributions: tax relief for members: methods: claims - HMRC internal manual - GOV.UK (www.gov.uk)