Maximum annual pension contribution (annual allowance?) for tax relief purposes

What_time_is_it

I'm looking to make a one-off contribution to my DC pension pot. I understand that the maximum that tax relief can be claimed on is £60,000 or your annual income (whichever is lower). Is that correct? And how is annual income calculated? Does it include savings interest?

Example:
Let's say that my salary for the 24/25 tax year is £40,000
I have a DB pension scheme to which I will contribute £3,000 and my employer contributes £7,000
And I expect to receive £3,000 in savings interest over the course of 24/25.
What would be the maximum lump sum I can invest into my DC pension this year? £30,000? £27,000? Something else?
And what happens if I contribute more than this and end up paying more into pensions that my salary?

Thanks

hugheskevi

What_time_is_it said:

I'm looking to make a one-off contribution to my DC pension pot. I understand that the maximum that tax relief can be claimed on is £60,000 or your annual income (whichever is lower). Is that correct? 

Not quite, it would be "the maximum that tax relief can be claimed on is £60,000 (plus any available carry-forward, less any adjustment if subject to a tapered Annual Allowance or Money Purchase Annual Allowance), or your earnings that attract tax relief (whichever is lower)"

The link tells you what qualifies for tax relief - savings interest does not.

Example:

Let's say that my salary for the 24/25 tax year is £40,000
I have a DB pension scheme to which I will contribute £3,000 and my employer contributes £7,000
And I expect to receive £3,000 in savings interest over the course of 24/25.
What would be the maximum lump sum I can invest into my DC pension this year? £30,000? £27,000? Something else?
And what happens if I contribute more than this and end up paying more into pensions that my salary?

Earnings that attract tax relief =£40,000
Less contributions made to DB pension=£37,000 (employer contributions don't count here)
Maximum gross contribution to qualify for relief = £37,000
Net contribution to a Relief-at-Source scheme required = £29,600

What_time_is_it

So, in the example above, I would be able to make a one-off payment of £30,000?
Is that correct?

What if I put in £40,000?
Would that mean that I would get tax relief on only the first £30,000?
Does this create any problems?

hugheskevi

What_time_is_it said:

So, in the example above, I would be able to make a one-off payment of £30,000?
Is that correct?

What if I put in £40,000?
Would that mean that I would get tax relief on only the first £30,000?
Does this create any problems?

I edited to add a bit - max one off payment would be £29,600 which would be grossed up to £37,000 by the provider.

If you put in more you would initially be given too much tax relief and create an annoying problem to unravel in due course when HMRC realises.

Note that your pension input to your DB scheme is calculated from the benefits you accrue, not your contributions and your employer's contributions. For reference, a member with earnings of £40,000 in the Civil Service pension scheme would have a pension input of around £15,000. So if that person also put £37K into a DC scheme they would be getting up toward the Annual Allowance.

Marcon

hugheskevi said:

What_time_is_it said:

So, in the example above, I would be able to make a one-off payment of £30,000?
Is that correct?

What if I put in £40,000?
Would that mean that I would get tax relief on only the first £30,000?
Does this create any problems?

I edited to add a bit - max one off payment would be £29,600 which would be grossed up to £37,000 by the provider.

If you put in more you would initially be given too much tax relief and create an annoying problem to unravel in due course when HMRC realises.

...and your pension provider might not accept non-relievable contributions, creating a more immediate headache.

For details of what constitutes 'relevant earnings' see https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100 

What_time_is_it

How do I work out the value of the annual accrued benefit from my DB scheme?

hugheskevi

What_time_is_it said:

How do I work out the value of the annual accrued benefit from my DB scheme?

Not easily, and it is very difficult to get it precise - especially if you are not familiar with the exact technical detail of your pension scheme rules, eg, around revaluation rules, final pensionable earnings definitions, etc.

Guidance and a worked example is at the link.

What_time_is_it

Thanks, so...

If my income is £40,000
And my accrued benefit from my DB scheme is £20,000
What happens if I make a contribution to my DC pension of £25,000?
Is that ok because it's under the £60k annual allowance? Or not ok because it's more than my earnings?

Marcon

What_time_is_it said:

Thanks, so...

If my income is £40,000
And my accrued benefit from my DB scheme is £20,000
What happens if I make a contribution to my DC pension of £25,000?
Is that ok because it's under the £60k annual allowance? Or not ok because it's more than my earnings?

Answered already:

hugheskevi said:

What_time_is_it said:

I'm looking to make a one-off contribution to my DC pension pot. I understand that the maximum that tax relief can be claimed on is £60,000 or your annual income (whichever is lower). Is that correct? 

Not quite, it would be "the maximum that tax relief can be claimed on is £60,000 (plus any available carry-forward, less any adjustment if subject to a tapered Annual Allowance or Money Purchase Annual Allowance), or your earnings that attract tax relief (whichever is lower)"

or see https://www.gov.uk/tax-on-your-private-pension

What_time_is_it

Marcon said:

What_time_is_it said:

Thanks, so...

If my income is £40,000
And my accrued benefit from my DB scheme is £20,000
What happens if I make a contribution to my DC pension of £25,000?
Is that ok because it's under the £60k annual allowance? Or not ok because it's more than my earnings?

Answered already:

hugheskevi said:

What_time_is_it said:

I'm looking to make a one-off contribution to my DC pension pot. I understand that the maximum that tax relief can be claimed on is £60,000 or your annual income (whichever is lower). Is that correct? 

Not quite, it would be "the maximum that tax relief can be claimed on is £60,000 (plus any available carry-forward, less any adjustment if subject to a tapered Annual Allowance or Money Purchase Annual Allowance), or your earnings that attract tax relief (whichever is lower)"

or see https://www.gov.uk/tax-on-your-private-pension

Thanks. Just to clarify - in the example given, I would have gone over the amount allowable by £5k right? Because I would have contributed £45k into pensions, and my earnings over that same period were £40k? Is that correct?
Sorry!

hugheskevi

What_time_is_it said:

Marcon said:

What_time_is_it said:

Thanks, so...

If my income is £40,000
And my accrued benefit from my DB scheme is £20,000
What happens if I make a contribution to my DC pension of £25,000?
Is that ok because it's under the £60k annual allowance? Or not ok because it's more than my earnings?

Answered already:

hugheskevi said:

What_time_is_it said:

I'm looking to make a one-off contribution to my DC pension pot. I understand that the maximum that tax relief can be claimed on is £60,000 or your annual income (whichever is lower). Is that correct? 

Not quite, it would be "the maximum that tax relief can be claimed on is £60,000 (plus any available carry-forward, less any adjustment if subject to a tapered Annual Allowance or Money Purchase Annual Allowance), or your earnings that attract tax relief (whichever is lower)"

or see https://www.gov.uk/tax-on-your-private-pension

Thanks. Just to clarify - in the example given, I would have gone over the amount allowable by £5k right? Because I would have contributed £45k into pensions, and my earnings over that same period were £40k? Is that correct?
Sorry!

You need to appreciate that the Annual Allowance is completely separate from the relevant earnings rules, each one has completely different rules and different things count and don't count.

Annual Allowance works in terms of pension inputs, which includes employer contributions to DC schemes and pension input amounts from DB schemes (DB pension inputs being based on pension accrued, not employer or employee contributions).

Relevant earnings is based on components of the list linked earlier in the thread. This does not include savings income, rental income, DB pension inputs, employer pension contributions nor any member contributions made via salary sacrifice (as those are simply employer contributions).

So in the example:

If my income is £40,000
And my accrued benefit from my DB scheme is £20,000
What happens if I make a contribution to my DC pension of £25,000?
Is that ok because it's under the £60k annual allowance? Or not ok because it's more than my earnings?

You have Relevant Earnings of £40,000. In the earlier example you had £3,000 of member contributions to the DB scheme, reducing Relevant Earnings to £37,000. If you make a (net) DC contribution of £25,000 that would be grossed up to £31,250 by the provider for basic rate relief. As £31,250 is less than your Relevant Earnings of £37,000 everything is fine.

For the Annual Allowance check, you have a DB pension input of £20,000. If you make a (net) DC contribution of £25,000 that would be grossed up to £31,250 by the provider for basic rate relief. The total pension input is £20,000 plus £31,250 which is £51,250. This is less than the £60,000 Annual Allowance so you are fine (unless Money Purchase Annual Allowance applies or you have very significant other income to trigger tapered Annual Allowance).