Is this calculation wrong? One off payments into pension and annual allowance carry-back

Linton

yellow_barchetta said:

Ah, now that is the shortcut I was looking for!!!

So, if I have £50k of unused (gross) annual allowance available for "one off" payments into the pension fund, my calculation should be (in cash terms) to put £40k into the fund (cash goes down), claim £10k back via HMRC (cash goes up) and £50k would be added to my pension pot - with nothing else to do, at a net cost of £30k cash.  

Yes-ish.  The £40K will be increased to £50K by the pension company using HMRC money.  If the amount you paid in was all within your higher rate band you claim the extra £10K higher rate tax back from HMRC. If you do nothing this will be repaid after the end of the tax year when HMRC can see the full picture.

zagfles

yellow_barchetta said:

zagfles said:

yellow_barchetta said:

Ah, now that is the shortcut I was looking for!!!

So, if I have £50k of unused (gross) annual allowance available for "one off" payments into the pension fund, my calculation should be (in cash terms) to put £40k into the fund (cash goes down), claim £10k back via HMRC (cash goes up) and £50k would be added to my pension pot - with nothing else to do, at a net cost of £30k cash.  

Not if you earn £90k, then you won't get the full 40% tax relief on £50k. Only £40k approx will be in higher rate tax. So you'd get about £8k back. 

But if I can use previous years' unused allowances, would that not help?  Or can I only get relief at the marginal rate in the year that I make the deposit?  That does make sense, but wasn't quite where I thought it was going in my head!

No, you can only carry forwards the pension AA, not tax relief.  Second sentence is correct. 

yellow_barchetta

Dazed_and_C0nfused said:

yellow_barchetta said:

MK62 said:

yellow_barchetta said:

Or does the additional relief only come at a rate of 20% because that lifts the personal allowance upwards?  Running the maths I can see that that iterative process of £2,500 both as "top up" and as "reclaim" sums to £16,666, which is ultimately the answer I instinctively expected to be able to increase the pension fund by.

You already got half the relief due when HMRC gave you BR relief (£2500)......you claim the other  "up to" 20% via your tax return.

I don't think that's mathematically correct.  The two 20%s don't add together neatly like that.

20% tax of £12,500 = £2,500, £10,000 remainder.
40% tax of £16,666 = £6,666, £10,000 remainder.

If the mechanism that the govt uses simplifies this by effectively applying 25% to both the initial "top up" and any reclaim (if paid in cash) then that's what makes the difference isn't it?

Until you take note of what other posters are telling you you will never get this right.

Whatever you pay over (as a relief at source contributions) has 25% added by the pension company.  What your Personal tax situation is is irrelevant, it's always 25%.

So each £100 from you becomes £125 in the pension fund.  There is no other option (for contributions that have tax relief added).

And I fully understand this.  But I'm framing it differently.  I'm trying to come from a perspective of ensuring that the maximum possible is added to my pension fund based on having a specific amount of cash in my bank account.  If I make a pension contribution AND get cash back from the govt via a tax relief mechanism, that's not what I want to achieve; or at least, I have a decision to make about what I do with that tax relief cash.  

If I have £10,000 in my bank account today, and I'm a higher rate tax payer with unused annual allowance capacity, I can make my pension fund grow by £16,666.  I can do this two ways:-
- I do the daft iterative approach of paying in, getting 25% added by the pension company, then reclaiming a further 25% via my tax code and then re-depositing multiple times.
OR
- I can borrow £3,333 from someone, deposit £13,333, and then reclaim £3,333 back via my tax code.

Either way, I end up with £10,000 less cash on my hands than when I started, and the pension pot increases by £16,666.

In your example, I miss out of £16 going into my pension fund and instead I only end up with spending £75 cash because I spend the £100 but get £25 cash back from HMRC.  And I don't want to do that.  

yellow_barchetta

(And I should add, then repay the £3,333 loan when I get the tax back!)

MK62

yellow_barchetta said:

@Linton and @zagfles you are absolutely right  (and thanks for your help!), but sometimes it's useful to get ones head around it.  And if was wanting to make sure that I used my full 3 years of unused annual allowance, for example, it's important to get the right gross to net calculation, isn't it?  I know precisely how much unused AA I have (from info from my pension provider), so now I also know precisely how to convert that into one or more payments into a pension fund too.

Surely the point of discussing things here might be to optimise claims etc.  If I'd followed the advice of @MK62
on here I'd have been grossing £10,000 up to £15,000, assuming £15,000 was the amount being set off against my annual allowance and therefore carrying forward (on a spreadsheet, at the very least) an incorrect amount of AA unused.  Getting it right (£10000 / 0.6) has some importance, doesn't it? 

I've also now understood your point about simplicity, which I agree with!

Which "advice" is that then?........I haven't mentioned £15000 at all, nor given any "advice" that you should or would gross up £10000 to £15000.......nor made any mention of annual allowance......perhaps you should reread the posts, as I'm not sure you are fully  grasping the concept of how HR tax relief works.....I stated quite clearly, several times, that if you personally contribute £10000 in cash to your pension, you are making a £12500 gross contribution. 

Sarahspangles

There’s something you’re not getting?

I pay into my SIPP every year, and as a higher rate tax payer I want to ensure I contribute enough that I’m not assessed at higher rate on any of my income.  But what is actually sitting in my SIPP is what I contributed plus tax relief. Every £10k was £8k from me and £2k from HMRC. And sitting in my non-SIPP savings is a bit more cash because I paid a bit less tax than I would have if I’d paid higher rate tax.

The max you can contribute is your taxable earnings. No carry forward. You also need to check you’re within the Annual Allowance, where there is the potential for carry forward.

zagfles

yellow_barchetta said:

Dazed_and_C0nfused said:

yellow_barchetta said:

MK62 said:

yellow_barchetta said:

Or does the additional relief only come at a rate of 20% because that lifts the personal allowance upwards?  Running the maths I can see that that iterative process of £2,500 both as "top up" and as "reclaim" sums to £16,666, which is ultimately the answer I instinctively expected to be able to increase the pension fund by.

You already got half the relief due when HMRC gave you BR relief (£2500)......you claim the other  "up to" 20% via your tax return.

I don't think that's mathematically correct.  The two 20%s don't add together neatly like that.

20% tax of £12,500 = £2,500, £10,000 remainder.
40% tax of £16,666 = £6,666, £10,000 remainder.

If the mechanism that the govt uses simplifies this by effectively applying 25% to both the initial "top up" and any reclaim (if paid in cash) then that's what makes the difference isn't it?

Until you take note of what other posters are telling you you will never get this right.

Whatever you pay over (as a relief at source contributions) has 25% added by the pension company.  What your Personal tax situation is is irrelevant, it's always 25%.

So each £100 from you becomes £125 in the pension fund.  There is no other option (for contributions that have tax relief added).

And I fully understand this.  But I'm framing it differently.  I'm trying to come from a perspective of ensuring that the maximum possible is added to my pension fund based on having a specific amount of cash in my bank account.  If I make a pension contribution AND get cash back from the govt via a tax relief mechanism, that's not what I want to achieve; or at least, I have a decision to make about what I do with that tax relief cash.  

If I have £10,000 in my bank account today, and I'm a higher rate tax payer with unused annual allowance capacity, I can make my pension fund grow by £16,666.  I can do this two ways:-
- I do the daft iterative approach of paying in, getting 25% added by the pension company, then reclaiming a further 25% via my tax code and then re-depositing multiple times.
OR
- I can borrow £3,333 from someone, deposit £13,333, and then reclaim £3,333 back via my tax code.

Either way, I end up with £10,000 less cash on my hands than when I started, and the pension pot increases by £16,666.

In your example, I miss out of £16 going into my pension fund and instead I only end up with spending £75 cash because I spend the £100 but get £25 cash back from HMRC.  And I don't want to do that.  

You probably don't need to borrow for most of it - you could phone HMRC and tell them you're going to make a £16,666 (gross) pension contribution to a personal pension.

They should then adjust your tax code to give you the additional tax relief. What they should do is increase the tax free amount in your tax code by half your intended gross contribution (assuming it all falls within higher rate). 

So tax free amount increased by £8333 which means you'll pay £3333 less tax over the tax year. If you were to do that now, half way through the tax year, you'd get about half in your next payslip and the rest month by month over the rest of the tax year. Assuming you have a normal cumulative tax code. If you make the pension contribution late in the tax year you should have got nearly all the additional tax relief by the time you pay it. 

yellow_barchetta

Sarahspangles said:

There’s something you’re not getting?

I pay into my SIPP every year, and as a higher rate tax payer I want to ensure I contribute enough that I’m not assessed at higher rate on any of my income.  But what is actually sitting in my SIPP is what I contributed plus tax relief. Every £10k was £8k from me and £2k from HMRC. And sitting in my non-SIPP savings is a bit more cash because I paid a bit less tax than I would have if I’d paid higher rate tax.

The max you can contribute is your taxable earnings. No carry forward. You also need to check you’re within the Annual Allowance, where there is the potential for carry forward.

Yes, you can bring forward unused annual allowances from the previous 3 years to allow you to contribute more in the current year if you have the funds to do so.  So if you want to you can put the non-SIPP savings into the SIPP too, if you have space in your annual allowance.  

yellow_barchetta

MK62 said:

yellow_barchetta said:

@Linton and @zagfles you are absolutely right  (and thanks for your help!), but sometimes it's useful to get ones head around it.  And if was wanting to make sure that I used my full 3 years of unused annual allowance, for example, it's important to get the right gross to net calculation, isn't it?  I know precisely how much unused AA I have (from info from my pension provider), so now I also know precisely how to convert that into one or more payments into a pension fund too.

Surely the point of discussing things here might be to optimise claims etc.  If I'd followed the advice of @MK62
on here I'd have been grossing £10,000 up to £15,000, assuming £15,000 was the amount being set off against my annual allowance and therefore carrying forward (on a spreadsheet, at the very least) an incorrect amount of AA unused.  Getting it right (£10000 / 0.6) has some importance, doesn't it? 

I've also now understood your point about simplicity, which I agree with!

Which "advice" is that then?........I haven't mentioned £15000 at all, nor given any "advice" that you should or would gross up £10000 to £15000.......nor made any mention of annual allowance......perhaps you should reread the posts, as I'm not sure you are fully  grasping the concept of how HR tax relief works.....I stated quite clearly, several times, that if you personally contribute £10000 in cash to your pension, you are making a £12500 gross contribution. 

OK, maybe "advice" was overstating things; sorry.

But as I've explained, I'm thinking about the transaction in a subtlely different way.  I know that if I do in fact put £10,000 into a pension fund, it becomes £12,500 in the fund and £2,500 in my bank account.

But the way I was looking at it is "I've got £10k that I don't need and want to put inside my pension fund.  I don't want more cash coming back to me as tax relief, because I want that in the pension fund too.  So how do I end up with a nil cash movement on my bank accounts at the end of these transactions".  And I'm sure I'm not the only one who would think this way (though increasingly on this thread I'm wondering if I am the only one that thinks that way!)

I appreciate a lot of people might deposit £10k, reclaim the £2.5k *and then do something fun or other savings-related with the £2.5k*.  But that's not what I want to achieve.

yellow_barchetta

zagfles said:

yellow_barchetta said:

And I fully understand this.  But I'm framing it differently.  I'm trying to come from a perspective of ensuring that the maximum possible is added to my pension fund based on having a specific amount of cash in my bank account.  If I make a pension contribution AND get cash back from the govt via a tax relief mechanism, that's not what I want to achieve; or at least, I have a decision to make about what I do with that tax relief cash.  

If I have £10,000 in my bank account today, and I'm a higher rate tax payer with unused annual allowance capacity, I can make my pension fund grow by £16,666.  I can do this two ways:-
- I do the daft iterative approach of paying in, getting 25% added by the pension company, then reclaiming a further 25% via my tax code and then re-depositing multiple times.
OR
- I can borrow £3,333 from someone, deposit £13,333, and then reclaim £3,333 back via my tax code.

Either way, I end up with £10,000 less cash on my hands than when I started, and the pension pot increases by £16,666.

In your example, I miss out of £16 going into my pension fund and instead I only end up with spending £75 cash because I spend the £100 but get £25 cash back from HMRC.  And I don't want to do that.  

You probably don't need to borrow for most of it - you could phone HMRC and tell them you're going to make a £16,666 (gross) pension contribution to a personal pension.

They should then adjust your tax code to give you the additional tax relief. What they should do is increase the tax free amount in your tax code by half your intended gross contribution (assuming it all falls within higher rate). 

So tax free amount increased by £8333 which means you'll pay £3333 less tax over the tax year. If you were to do that now, half way through the tax year, you'd get about half in your next payslip and the rest month by month over the rest of the tax year. Assuming you have a normal cumulative tax code. If you make the pension contribution late in the tax year you should have got nearly all the additional tax relief by the time you pay it. 

Yes, the borrowing bit is a bit of unnecessary theatricality; are HMRC that open to a simple telephone call addressing that?  I know it would re-adjust when they do the end of year calcs etc, but I've not done that sort of thing before.

And I do want to make use of some unused allowance from earlier years too, so I suspect a letter would be the way to go to avoid confusion.  I can forecast my HR tax band usage for this year, so I can limit any HR relief-linked deposits if I want to and then do payments / claims next year also if the HR band I've got available is too small to allow for all of my deposits to attract HR relief.  I think my HR band has about £30k of capacity this year, so if I did have a pot of £50k cash ready to be locked away in a fund, I think it would make sense to use £30k (gross) this year and the remainder next year, wouldn't it?