Annual allowance and voluntary contributions

Mitts123

With the maximum amount someone can pay into their DC pension being the annual earnings, can you confirm if this before or after the tax relief?

For example, let's say someone is allowed to voluntarily pay in £10k into their pension (earnings for the year less annual allowance). Would they pay in £10k and get the 20% tax relief on top, or, would they pay in £8.3k and get £1.7k tax relief?

hugheskevi

Mitts123 said:

With the maximum amount someone can pay into their DC pension being the annual earnings, can you confirm if this before or after the tax relief?

For example, let's say someone is allowed to voluntarily pay in £10k into their pension (earnings for the year less annual allowance). Would they pay in £10k and get the 20% tax relief on top, or, would they pay in £8.3k and get £1.7k tax relief?

After tax-relief, although in your example they would contribute £8K and get £2K tax relief.

Note there is nothing special about a "voluntary" contribution - all pension contributions are voluntary, as you can opt-out of employer schemes.

Also, this has nothing to do with Annual Allowance, rather it is about earnings which attract tax relief. If someone's earned income is £10K and they have no other earnings which attract tax relief, that is their contribution limit for contributions eligible for tax relief. In particular, they do not deduct their Personal Allowance (which is what I think you are erroneously calling Annual Allowance?) for eligibility for tax relief from a Relief at Source scheme (it would be different for a net pay scheme, or a lump sum contribution where no tax relief is awarded at all).

Mitts123

Thanks for the reply @hugheskevi. I'll try to clarify the scenario:

Total earnings in 2024-25: £60k
Expected total pension contributions from monthly deductions: £50k
Potential additional contributions before Apr24: £10k

Although there are carry forward balances from previous years, my understanding is that the maximum that can be paid in for 24-25 is £60k. Given £50k will already have been paid in through monthly deductions, £8k could be paid in additionally, attracting a further £2k of tax relief.

Is that correct?

hugheskevi

Yes, is all correct, assuming that the additional contribution is to a relief at source scheme (eg SIPP, personal pension, etc).

Presumably at least some of the £50k is also to a relief at source scheme (or you have other taxable income) else you may not be benefiting from tax relief on the full contribution.

Mitts123

£60k all from a salary. The £50k is a mix of employer's contribution and the rest is deducted from the salary by the employer monthly.

hugheskevi

Employer contributions don't count for what you can personally contribute (they count for Annual Allowance, but given you have carry forward that does not appear to be an issue).

So if gross salary is 60k you deduct your member pension contribution (including tax relief) and whatever is left is available to be put into a relief at source pension.

Mitts123

I see, I didn't know. That changes my calculations. So to confirm, taking the below scenario, can I:

Gross earnings £60k
Employer's contribution for 24-25: 12% = £7.2k
Total of monthly contributions for 24-25 (deducted by employer and paid into pension): £40k 

If you say that the employer's contributions don't count, then I could make a one-off payment of £16k, attracting £4k of tax relief, bringing my total contribution (incl tax relief) to £60k for the year? Total increase would then be £72.2k including employer's contribution.

I have about £30k carry-over balance from previous years, but I know that the maximum amount possible is the total amount earned, in this case £60k. However, it seems that it is relevant as the £7.2k would utilise this balance.

If I do this, would I need to claim the £4k additional tax relief, or will the pension provider add this automatically?
 

hugheskevi

The principle is fine, but I think your total contribution, including tax relief, is £67.2k rather than £72.2k (40+20+7.2)?

Are you certain about which contribution method your employer uses (net pay or relief at source, or maybe even salary sacrifice?) The figures suggest it is net pay.

Any contribution over a combined £60k (your contribution, employer contribution and tax relief combined) will use up carry forward from past years.

Assuming you contribute to a relief at source provider, they will add basic rate relief automatically. Depending on the provider, this may take up to about 8 weeks to arrive following your contribution (but for tax relief purposes, it is the date of contribution that matters, not when you receive the relief).

Linton

Mitts123 said:

I see, I didn't know. That changes my calculations. So to confirm, taking the below scenario, can I:

Gross earnings £60k
Employer's contribution for 24-25: 12% = £7.2k
Total of monthly contributions for 24-25 (deducted by employer and paid into pension): £40k 

If you say that the employer's contributions don't count, then I could make a one-off payment of £16k, attracting £4k of tax relief, bringing my total contribution (incl tax relief) to £60k for the year? Total increase would then be £72.2k including employer's contribution.

I have about £30k carry-over balance from previous years, but I know that the maximum amount possible is the total amount earned, in this case £60k. However, it seems that it is relevant as the £7.2k would utilise this balance.

If I do this, would I need to claim the £4k additional tax relief, or will the pension provider add this automatically?
 

I suggest you always work in terms of gross contributions into your pension.  It avoids much confusion as the results of net contributions can be different depending on your tax band and how your contributions to your employers scheme are taxed.

For the £60K limit employer contributions to your pension do count - the limit is on the total gross  contributions. But you do have carry over from previous years.

The limit based on your gross earnings is completely separate.  It only includes your gross contributions and there is no carry over.

You must satisfy both limits.

If you are making contributions from your taxed money the basic rate portion of the tax (ie 25% of your total net contribution)  is added directly into your pension by the pension compamy.  Any extra higher rate relief is calculated by HMRC and included in their annual tax liabiliy calculation.  Any excess tax taken is paid directly to you rather than your poension.

Albermarle

Total of monthly contributions for 24-25 (deducted by employer and paid into pension): £40k 

Can you clarify if this £40K is coming out of your salary before tax is taken ( as it seems from your posts) or out of your taxed pay, in which case the calculations will be different.

jamesd

Strictly, it's not necessarily before or after tax relief. This is because with RAS schemes (not salary sacrifice or net pay) part of the relief is added to the pension and part returned to higher rate tax payers, with only the bit arriving in the pension counting.

So rather than tax relief think "the amount ending up in the pension(s), whoever funds that amount".

Employer contributions count.

There are three ways employee contributions can be done and the way matters to the answers:

1. Salary sacrifice. A contractual reduction in your gross pay that saves you NI. The amount sacrificed ends up in the pension with no tax relief added because it's done before tax. Often employers add some of their saved NI and this also counts. The whole amount is legally an employer contribution.

2. Net pay. The deduction is done from your gross pay before tax. The amount deducted ends up in the pension with no further tax relief added.

3. Relief at source. Deduction or contribution from net pay or other already taxed source. 25% is added to give the amount in the pension and the amount counted is 1.25 times the contribution. In addition and not counted towards limits higher rate tax payers can tell HMRC the gross (number after multiplying by 1.25) and HMRC will give them the rest of their relief into their bank account.