Consequences of overpaying pension?

beeza650

I am a contractor via an umbrella company. I instructed them to deduct a fixed amount from my daily income via salary sacrifice. I miscalculated (badly) and will end up paying just over £20k more into my Hargreaves Lansdown SIPP than my annual allowance. 
I know I will need to repay the income tax but presumably not the employer's NI (and employees NI for that matter) or the apprenticeship levy?

If I understand correctly I will be "double taxed" on the overpayment as I will pay income tax when withdrawing from the pension by making yearly withdrawals up to the start of the 40% threshold.

Arghhh

Again though, if I understand correctly, if I hadn't overpaid then any non-capital gain on that £20K would be taxed at my marginal 40% rate whereas it will effectively be basic rate in my pension and also I avoided the employer's NI and apprenticeship levy which together run at 14.3%.
I can't do the maths but together that can't be too far off the double taxation at pension withdrawal right/

I wonder if it could ever be a "good" idea to exceed the threshold in these circumstances?

Thanks for your thoughts

Dazed_and_C0nfused

Have you any unused annual allowance available to carry forward?

beeza650

Dazed_and_C0nfused said:

Have you any unused annual allowance available to carry forward?

Yes but the 20k is after that's used

zagfles

The only consequence of exceeding the annual allowance is that you have to pay the annual allowance tax charge, you pay tax at your highest marginal rate on the excess. You don't need to unwind anything else eg NI etc. It's perfectly legal to exceed the annual allowance, you just get taxed on it. (and of course pension withdrawal is mostly taxed so effectively double taxation in most cases).

You need to fill in the "Pension savings tax charges" section of your tax return. You might be able to get HL to pay the charge from your SIPP, depending on criteria, but you still need to do the above mentioned tax return section (there's a box for charge paid by scheme).

DavidT67

Does it not make sense to continue with the overpayments and pay the tax charge ? As since you are working via Umbrella you are sidestepping both Employers and Employee National Insurance deductions.  That's 25.8% up to £50K earnings and 15.8% thereafter.  Also note that you can pay the tax charge from the pension assets rather than out of pocket.

beeza650

Ok, so if the combined income tax up to £50,271 is 15% and after taking into account that 25% can be taken tax-free you end up with an effective rate of 11.25% when withdrawing your pension (up to that 40% tax threshold).

Me saying the employer's NI and levy is 14.3% (13.8% + 0.5%)  is a bit confusing (it's actually wrong as it doesn't take into account the 0% NI threshold). I calculate it to be coincidentally around the same as the effective tax rate above, so 11.25%ish though it depends on exactly how much you earn per month, which varies a bit for me.

Now factor in employees' NI which in my case would be 2% and things are stacking up in favour of deliberately overpaying. 

Further to that, we are talking about income that would have attracted a marginal rate of 60% as it sits in the £100 to 125k bracket. Now overpaying looks like a very good mistake to have made.

Are my observations here wildly wrong or is this making sense? 
Thanks

beeza650

DavidT67 said:

Does it not make sense to continue with the overpayments and pay the tax charge ? As since you are working via Umbrella you are sidestepping both Employers and Employee National Insurance deductions.  That's 25.8% up to £50K earnings and 15.8% thereafter.  Also note that you can pay the tax charge from the pension assets rather than out of pocket.

That's where my thinking's at - infact I'm considering overpaying further.
Very interested how you derive the 15.8% please - I feel it's closer to 13.25% but then include that we're talking about earnings that would have otherwise been in the 60% bracket and also that any investment growth would be taxed at 11.25% and it's looking like a no brainer.

artyboy

beeza650 said:

Dazed_and_C0nfused said:

Have you any unused annual allowance available to carry forward?

Yes but the 20k is after that's used

I apologise if I'm labouring this point, but you're saying that in addition to your £60k annual allowance, you are also using carry forward allowance from the past 3 years, and even then you are STILL over your allowance by £20k?

if that's actually the case, are your taxable earnings beyond HR tax, and actually into 45% additional rate? Because you could end up needing to pay a bit more than you might be thinking if you were working on the basis of a 40% rate.

beeza650

artyboy said:

beeza650 said:

Dazed_and_C0nfused said:

Have you any unused annual allowance available to carry forward?

Yes but the 20k is after that's used

I apologise if I'm labouring this point, but you're saying that in addition to your £60k annual allowance, you are also using carry forward allowance from the past 3 years, and even then you are STILL over your allowance by £20k?

if that's actually the case, are your taxable earnings beyond HR tax, and actually into 45% additional rate? Because you could end up needing to pay a bit more than you might be thinking if you were working on the basis of a 40% rate.

yes - £20k over even taking into account £10.5k carry forward.

no - not into 45% - I'm actually now thinking of upping my pension contribution to keep taxable income < £100k. 

DavidT67

beeza650 said:

DavidT67 said:

Does it not make sense to continue with the overpayments and pay the tax charge ? As since you are working via Umbrella you are sidestepping both Employers and Employee National Insurance deductions.  That's 25.8% up to £50K earnings and 15.8% thereafter.  Also note that you can pay the tax charge from the pension assets rather than out of pocket.

That's where my thinking's at - infact I'm considering overpaying further.
Very interested how you derive the 15.8% please - I feel it's closer to 13.25% but then include that we're talking about earnings that would have otherwise been in the 60% bracket and also that any investment growth would be taxed at 11.25% and it's looking like a no brainer.

I'm accounting for the ER and EE NI deduction you will avoid and would otherwise be paying.

That's 13.8% ER plus 2% EE above £50K and 13.8% ER plus 12% EE betwen £12.5K and £50K. 

Income Tax charge you'd pay at your marginal rate on net relevant earnings after completing self assessment return.

NB I'm in a similar situation and will be taking the same approach in next tax year.

beeza650

DavidT67 said:

beeza650 said:

DavidT67 said:

Does it not make sense to continue with the overpayments and pay the tax charge ? As since you are working via Umbrella you are sidestepping both Employers and Employee National Insurance deductions.  That's 25.8% up to £50K earnings and 15.8% thereafter.  Also note that you can pay the tax charge from the pension assets rather than out of pocket.

That's where my thinking's at - infact I'm considering overpaying further.
Very interested how you derive the 15.8% please - I feel it's closer to 13.25% but then include that we're talking about earnings that would have otherwise been in the 60% bracket and also that any investment growth would be taxed at 11.25% and it's looking like a no brainer.

I'm accounting for the ER and EE NI deduction you will avoid and would otherwise be paying.

That's 13.8% ER plus 2% EE above £50K and 13.8% ER plus 12% EE betwen £12.5K and £50K. 

Income Tax charge you'd pay at your marginal rate on net relevant earnings after completing self assessment return.

NB I'm in a similar situation and will be taking the same approach in next tax year.

Ok, so I've run the figures the marginal initial saving by overpaying is 14.26% for me. Not 15.8% @DavidT67
These are monthly figures, the total deduction difference is £713.04 which is 14.26% of the extra £5000 paid into pension.
In addition, you need to factor in the year-on-year growth (hopefully) of a pension is paid and compounds tax-free until drawdown. Does anyone feel like having a guess what that might be worth as a % ? It's late and that's too complicated for me to think about right now.
It all looks pretty rosy.

I made a mistake though (given current rules), 25% tax-free is only up to 25% of the Life Time Allowance, which I will exceed, so my marginal rate on pension drawdown isn't 11.25% if I go the lump sum route. I can only guess what it might be,13% maybe.

I will tweak my spreadsheet and work out what the impact of the drop in EmployeeNI rate means in January.