Pay a lump sum into a pension question.

Idpullthecurtain

I am a pension novice so it would be great if I could check some things with forum members.

Am I right about this: if I paid 100k (for example) as a lump sum into private pension.  This would attract a 25% attract a 25% tax top up from the government?  So I would be paid £25k.
So this bonus is the price I pay for locking away the sum until Im 57? 

Is this correct?  TIA

MeteredOut

It's tax relief, not a tax top up.

So, in principle the answer is yes, but do you have appropriate earnings in this tax year, and the cumulative annual allowances available, to add in £125K in a single tax year?

If you do, you may also get additional relief if you're paying tax at higher tax bands.

Idpullthecurtain

MeteredOut said:

It's tax relief, not a tax top up.

So, in principle the answer is yes, but do you have appropriate earnings in this tax year, and the cumulative annual allowances available, to add in £125K in a single tax year?

If you do, you may also get additional relief if you're paying tax at higher tax bands.

Thanks.  Making use of  unused allowance from the previous three tax years to give me the limit that should allow for 100k.  So if I had that amount, I could deposit as a lump sum, and 25% would be added to it by Govt?
It seems crazy to me.  

(I am not paying higher tax bands.  I pay Basic Rate)

MeteredOut

The limits are applied to the gross amount (jncluding tax relief), so £125K, not £100K cumulative allowance. And you'd also need your qualifying earnings this tax year to be at least £125K (there is not carry forward for this).

(there are more nuances here, such as actually being able to put more than the limits in, but then being hit with charges, eg Annual Allowance charge)

Dazed_and_C0nfused

Idpullthecurtain said:

MeteredOut said:

It's tax relief, not a tax top up.

So, in principle the answer is yes, but do you have appropriate earnings in this tax year, and the cumulative annual allowances available, to add in £125K in a single tax year?

If you do, you may also get additional relief if you're paying tax at higher tax bands.

Thanks.  Making use of  unused allowance from the previous three tax years to give me the limit that should allow for 100k.  So if I had that amount, I could deposit as a lump sum, and 25% would be added to it by Govt?
It seems crazy to me.  

(I am not paying higher tax bands.  I pay Basic Rate)

How are you able to make a gross contribution of £125k then?

I don't mean how can you afford to, I mean how can you do it in line with the rules around carry forward of unused annual allowance?

af1963

You can pay in, gross ( including the added tax relief), up to the total amount of your gross work earnings ( salary and taxable benefits) and get tax relief on it. 

Essentially, that (temporarily) gives you back all the tax you paid on the amount you contribute.  Plus you can get tax relief on the part of your salary that was covered by your tax allowance, even though you paid no tax on that part.  You'll probably be taxed on withdrawing most of the money later, so it's not quite as good as it initially appears, but still helps.

Veteransaver

Idpullthecurtain said:

I am a pension novice so it would be great if I could check some things with forum members.

Am I right about this: if I paid 100k (for example) as a lump sum into private pension.  This would attract a 25% attract a 25% tax top up from the government?  So I would be paid £25k.
So this bonus is the price I pay for locking away the sum until Im 57? 

Is this correct?  TIA

You'd need to have taxable earnings of at least 125k this tax year, and also have sufficient remaining allowance from the previous 3 years (current maximum you can contribute is £60k in a tax year but was previously £40k before 23-24 tax year. 

MX5huggy

  So if I had that amount, I could deposit as a lump sum, and 25% would be added to it by Govt?
It seems crazy to me. 

That’s how pensions work, in exchange for locking money away you receive tax relief on the contributions. 

You do need to be aware that when you take the money out of the pension you pay tax on 75% of the pot at your applicable rate at the time. So you get 25% tax free. For a simple 20% tax payer this means it’s 6.25% better to pay into pension. 

bjorn_toby_wilde

Veteransaver said:

Idpullthecurtain said:

I am a pension novice so it would be great if I could check some things with forum members.

Am I right about this: if I paid 100k (for example) as a lump sum into private pension.  This would attract a 25% attract a 25% tax top up from the government?  So I would be paid £25k.
So this bonus is the price I pay for locking away the sum until Im 57? 

Is this correct?  TIA

You'd need to have taxable earnings of at least 125k this tax year, and also have sufficient remaining allowance from the previous 3 years (current maximum you can contribute is £60k in a tax year but was previously £40k before 23-24 tax year. 

Unless I’m mistaken the OP would need taxable earnings of £60k this year, not £125k.

You can contribute 100% of earnings up to £60k but more than that would have to come from previous years allowance carried forward.

Grumpy_chap

Contributions to a pension are restricted by two parameters.

RELEVANT EARNINGS

The maximum (gross) that the OP can contribute to a pension in the current tax year is restricted by their "relevant earnings":
https://www.aegon.co.uk/adviser/knowledge-centre/technical-zone/what-are-relevant-uk-earnings#

Employer contributions to a work place scheme are not included within the "relevant earnings" cap but employee contributions to a work place scheme are included.  Note Salary Sacrifice contributions become employer and not employee contributions.

ANNUAL ALLOWANCE

The maximum that can be contributed is restricted by the Annual Allowance (currently £60k) plus carry forward to unused AA from previous years.

In the current tax year, the absolute maximum AA (plus carry forward) is £200k.  Note, this may be reduced for high earners.

All types of contributions are counted against the AA - personal contributions, employer contributions, employee contributions.  It is the gross value that counts for the limit.



For the OP to make a contributions of £100k, grossed up to £125k, the OP needs to have both relevant earnings of £125k or more plus available Annual Allowance (plus carry forward).
The OP indicated they are a basic rate tax payer, so this would suggest they are not able to meet the relevant earning criteria to make contributions of £100k (or £125k).  There may be further details the OP has not shared that make this possible - for example a Director - Owner of Ltd Company might make pension contributions as employer contributions but the individual still remain basic rate tax payer.

bjorn_toby_wilde

Thanks. I wasn’t aware of that