Pension Tax Relief / Annual Allowance Alpha DB plus Sipp

michaels

Was checking I was not exceeding the 60k AA but now I am also worried about whether 'no tax relief if above annual income' may come into play.

Income is about 44k.  Current Alpha is 22.5k (April 23 following cpi uplift).  New alpha contributions will add 2.7k. 

Was hoping to add balance of income (20k) to sipp. 

However just noticed that tax relief is limited to contributions up to value of earned income and that value of DB contributions is not the contributions but 16x the change in benefits.

Crude calc - 16 x 2.7k = 43.2k leaving basically no space for any relief on sipp contributions.

Am I doing the correct sums?  Thanks

NoMore

The pension input amount (what your crude 16x calculation is) for AA purposes is nothing to do with the tax relief limit.

Your conflating the AA and the Tax relief limit and getting your self mixed up. 

The AA is the limit you can pay into a pension for all sources per year. For DB pensions you have correctly identified that this is not simply the contributions but the Pension input amount (PIA). The PIA is nothing to do with personal contributions to pensions that attract tax relief and should not be considered against the tax relief limit.

The Tax relief limit is that you can't claim more tax relief than your relevant earnings for the year.

They are separate limits with different purposes, they should not be conflated, like people often say you can pay in up to the AA or your earnings which ever is lower, this is wrong.

So you need to check that all your intended contributions (PIA and your own personal) don't exceed the AA and also separately that you personally are not claiming more tax relief than due to you.

You can also extend the AA by the previous 3 years unused allowance if required.

In your example (note I am just using your numbers I have no idea if your crude calc is correct, and going to assume the 20k contribution is gross)

For the AA test you are using 43.2k + 20k = 63.2k, so you need to use some carry forward of unused AA if available

For the Tax relief limit you are contributing 20k and your earned income is 44k, so you are not breaking the Tax relief limit.

michaels

This suggests that the tax relief calculation is based on the DB contributions not the value of the DB pension accrued (x16)

Pension Contributions Q&A | PruAdviser (mandg.com)

Q: My client is an active member of his employer’s defined benefit pension scheme. He also wants to make a personal pension contribution. How do I calculate the maximum personal contribution allowed for tax relief? He has a pensionable salary of £57,500 and pays 3% employee contribution.

A: Calculation one – tax relief

The client already pays £1,725 to the DB scheme therefore, to be eligible for tax relief, he can only pay up to a maximum of (£57,500 - £1,725) £55,775 gross to a personal pension plan.

Calculation two – annual allowance

His DB pension input amount for the current pension input period is estimated at approximately £11,000. He has fully used his annual allowance for previous years so has no carry forward available.

Therefore, available annual allowance is £60,000 less the DB pension input amount for the current tax year of £11,000 leaving £49,000.

Comparison

The remaining annual allowance is 49,000 ie less than £55,775. This means your client could pay up to £55,775 and receive tax relief on the whole amount. However, you know that his total pension savings would then exceed his available annual allowance (he has no carry forward) and he would have to report the excess of £6,775 (55,775 - 49,000) and declare the related tax charge. An AA excess/ charge reduces the tax efficiency of making this level of personal contribution.

In this scenario it may be more appropriate to limit the individual pension contribution to £49,000 gross as this will receive tax relief without causing any annual allowance excess.

As always, there will be exceptions to the rule. There may still be a net overall benefit for an individual to pay a personal contribution that actually causes them to have an annual allowance excess. This would be the case if the individual wanted to pay a larger pension contribution to get them out of the child benefit or personal allowance tax traps, or to reduce their threshold income to avoid a tapered annual allowance etc.

NoMore

Sorry yes the tax relief limit will also include your contributions to the employer scheme, unless done via salary sacrifice, note this is not the PIA but merely the amount you pay out of your salary to be a member of your DB scheme. However I doubt this is more than 24k per year for you if you earn 44k so with your numbers you still aren't breaking the tax relief limit.