Maximum Pension Contribution and Salary Sacrifice

Stringybob3

My current gross salary is £60k, but I salary sacrifice £16.8k (£1400 per month). I will also be receiving a bonus of approx. £20k later this year, 100% of which I will salary sacrifice to my pension. Am I allowed to add a further £23k to my pension to max out my £60k annual allowance, or does the HMRC treat my "taxable income" (i.e. £60k - £16.8k = £43.2k) as my income and therefore the maximum I can contribute? 

hugheskevi

Stringybob3 said:

My current gross salary is £60k, but I salary sacrifice £16.8k (£1400 per month). I will also be receiving a bonus of approx. £20k later this year, 100% of which I will salary sacrifice to my pension. Am I allowed to add a further £23k to my pension to max out my £60k annual allowance, or does the HMRC treat my "taxable income" (i.e. £60k - £16.8k = £43.2k) as my income and therefore the maximum I can contribute? 

Your earnings that attract tax relief are £60,000 + £20,000 = £80,000 before salary sacrifice (possibly more if other sources of income). This is the most you can receive tax relief on (either via salary sacrifice or another method of contribution).

You probably have carry-forward available, so £60,000 is not your maximum Annual Allowance, and the £80,000 of earnings that attract tax relief is likely to be the limiting factor.

Your salary sacrifice will be constrained by having to receive at least the Minimum Wage. You can contribute additional amounts through Relief-at-Source, for example, to a SIPP.

Mark_d

The max you can pay in is £60k.  This is the gross amount.  So you can pay in 60-16.8-20= £23.2k (gross)

NoMore

Your confusing AA and the tax relief limit and getting yourself tied up in knots, no doubt because you've heard that the max you can contribute to a Pension is the AA or your Salary which ever is the lower, which is just wrong and just causes problems for people when they start to look at it.

There is the AA, which is currently 60k and is a limit of all contributions to your pension(s) in a single year, so it includes employer and your own contributions. This limit can be extended by the previous 3 years unused allowance.

Then there is the tax relief limit, which is the maximum tax relief you can claim is limited by your relevant taxable income. This is for personal contributions made by relief at source, not salary sacrifice as by definition that's a employer contribution and as such not subject to tax relief. 

From your post there is not enough detail to resolve your query, is there any additional employer contributions beyond the salary sacrifice (there should be) and how do you intend to make the further contributions, is that more Salary Sacrifice  (in which case minimum wage legislations may become a factor) or do you want o make a contribution out of your post tax income (so the tax relief limit is in play) ?

If we assume your salary sacrifice is the total of your contributions this year (again is there not additional employer contributions?), this means that you have used 36.8k of your AA and have £23.2k left (maybe more with carryover). You also now have a take home of £43.2k, so on that basis you could either make a relief at source contribution to a pension of £18.56k (which will become 23.2k after basic tax relief claimed by the pension to come up to the full 60k AA or you could SalSac a further £23.2k income which would bring your taxable income down to 20k.

However if you have unused AA from the previous years your maximum you could contribute could be the whole of your wage, although that would have to be a combination of SalSac and relief at source due to minimum wage limits.

Albermarle

Mark_d said:

The max you can pay in is £60k.  This is the gross amount.  So you can pay in 60-16.8-20= £23.2k (gross)

To emphasise the point in the previous post the £60K includes employer contributions as well. 

Stringybob3

Thanks for the comments, very helpful as always. I will be making the contribution out of my post tax income and you are correct, there are also employers contributions that I need to factor in, so I will do some calculations. I do have unused AA, so am I correct in thinking that the tax relief limit will be the amount of tax that I have paid this year i.e. from my £43.2k take-home, I will pay approx. £6.1k in tax. Therefore I could add £24.4k to receive the £6100 tax relief? (I do also have rental income that is also subject to tax, but for the purposes of the above scenario to allow me get my tiny brain around it, I will ignore that for now)

Dazed_and_C0nfused

Stringybob3 said:

Thanks for the comments, very helpful as always. I will be making the contribution out of my post tax income and you are correct, there are also employers contributions that I need to factor in, so I will do some calculations. I do have unused AA, so am I correct in thinking that the tax relief limit will be the amount of tax that I have paid this year i.e. from my £43.2k take-home, I will pay approx. £6.1k in tax. Therefore I could add £24.4k to receive the £6100 tax relief? (I do also have rental income that is also subject to tax, but for the purposes of the above scenario to allow me get my tiny brain around it, I will ignore that for now)

The "tax relief limit" has got nothing whatsoever to do with the tax you have or will pay!

It really relates to the amount of your taxable earnings, which determines how much you can contribute and benefit from tax relief.

Separate to the annual allowance figure.

dharm999

Stringybob3 said:

Thanks for the comments, very helpful as always. I will be making the contribution out of my post tax income and you are correct, there are also employers contributions that I need to factor in, so I will do some calculations. I do have unused AA, so am I correct in thinking that the tax relief limit will be the amount of tax that I have paid this year i.e. from my £43.2k take-home, I will pay approx. £6.1k in tax. Therefore I could add £24.4k to receive the £6100 tax relief? (I do also have rental income that is also subject to tax, but for the purposes of the above scenario to allow me get my tiny brain around it, I will ignore that for now)

Why not increase your salary sacrifice amount, subject to minimum wage floor, as you will save the NI as well, compared to paying in from net income.