MPAA triggered is the pension taxed twice?

NickNick74

Hi, 

I Triggered my MPAA but continue to work and pay into a pension scheme. Over the period of a year, the first £10k is tax free but the remaining £7k is taxed at 40%. The £2800 tax due is paid direct to HMRC via schemes Pays under a self-assessment submission. When I finally retire, that new pot will be classed as a taxable income and taxed accordingly. Therefore that £7000 each year is eventually going to be taxed twice. Is that correct? 

Marcon

NickNick74 said:

Hi, 

I Triggered my MPAA but continue to work and pay into a pension scheme. Over the period of a year, the first £10k is tax free but the remaining £7k is taxed at 40%. The £2800 tax due is paid direct to HMRC via schemes Pays under a self-assessment submission. When I finally retire, that new pot will be classed as a taxable income and taxed accordingly. Therefore that £7000 each year is eventually going to be taxed twice. Is that correct? 

No. Have a look at the first paragraph on page 3: https://www.investcentre.co.uk/sites/default/files/AJBIC_Scheme_pays_guide.pdf 

NickNick74

Is there any clue as to what the Chancellor with do with the MPAA for the next budget 2025. Keep it at £10000 or lower it and tax more tax? 

NickNick74

*take more tax

Dazed_and_C0nfused

NickNick74 said:

Is there any clue as to what the Chancellor with do with the MPAA for the next budget 2025. Keep it at £10000 or lower it and tax more tax? 

Funny you should mention it but I've heard Rachel Reeves is currently deciding which of these three options to go with.

1.  Leave it the same
2.  Increase it
3.  Decrease it

I suspect you will find out the answer the same time as the rest of us.

Secret2ndAccount

Possibly, yes.  Did you get tax relief when you made the contributions? Less tax, so more in your take home pay because of your pension contributions. The 40% penalty is designed to cancel out the tax relief received by a 40% taxpayer. If you are (or would have been but for the pension contribs) a 40% taxpayer, then you haven't lost out. Everyone is liable for tax when they draw their pension. It is treated as income.
If you are only a 20% taxpayer then the penalty is more than the benefit. Could still be useful as there are benefits to having the money wrapped in a pension. Or if your employer is paying contributions dependent on yours, it could be worth taking the hit. However, it is unlikely you would benefit by making optional, unmatched contributions above the MPAA unless you are a 40% taxpayer.

Below MPAA:    Tax relief on the way in; some tax paid on the way out
Above MPAA, 40% taxpayer:  No tax relief on the way in; some tax paid on the way out
Above MPAA, 20% taxpayer:  Penalty exceeds tax relief on the way in; some tax paid on the way out

This is a practical, man-in-the-street description of the end result, not a pedantically perfect statement of the law.

EdSwippet

Marcon said:

NickNick74 said:

Hi, 

I Triggered my MPAA but continue to work and pay into a pension scheme. Over the period of a year, the first £10k is tax free but the remaining £7k is taxed at 40%. The £2800 tax due is paid direct to HMRC via schemes Pays under a self-assessment submission. When I finally retire, that new pot will be classed as a taxable income and taxed accordingly. Therefore that £7000 each year is eventually going to be taxed twice. Is that correct? 

No. Have a look at the first paragraph on page 3: https://www.investcentre.co.uk/sites/default/files/AJBIC_Scheme_pays_guide.pdf 

Notably, from the quoted AJB paper:

An important point to remember is that the annual allowance charge is not penal, it is simply reclaiming the tax relief that the individual is not entitled to above the annual allowance. Effectively this means that the excess pension contribution is not tax-relieved.

True enough as far as it goes. However, aside from any PCLS, future withdrawals from this pension will be taxable, so that the OP then effectively pays tax on a tranche of post-tax money. Real double-tax then, albeit on less than the full £7k over-contributed.

zagfles

Secret2ndAccount said:

Possibly, yes.  Did you get tax relief when you made the contributions? Less tax, so more in your take home pay because of your pension contributions. The 40% penalty is designed to cancel out the tax relief received by a 40% taxpayer. If you are (or would have been but for the pension contribs) a 40% taxpayer, then you haven't lost out. Everyone is liable for tax when they draw their pension. It is treated as income.
If you are only a 20% taxpayer then the penalty is more than the benefit. Could still be useful as there are benefits to having the money wrapped in a pension. Or if your employer is paying contributions dependent on yours, it could be worth taking the hit. However, it is unlikely you would benefit by making optional, unmatched contributions above the MPAA unless you are a 40% taxpayer.

Below MPAA:    Tax relief on the way in; some tax paid on the way out
Above MPAA, 40% taxpayer:  No tax relief on the way in; some tax paid on the way out
Above MPAA, 20% taxpayer:  Penalty exceeds tax relief on the way in; some tax paid on the way out

This is a practical, man-in-the-street description of the end result, not a pedantically perfect statement of the law.

How does the penalty exceed the tax relief? It's at marginal rate, not fixed at 40%. 

In any case, it's clearly double taxation as no relief means you're taxed on the way in and also on the way out. 

MK62

It might in some cases, at least AIUI, as the MPAA allowance charge is added to your taxable income, so if that then takes you over the HRT threshold, you'll pay tax at 40% on the amount over the threshold........but you may only have received tax relief at basic rate (20%).
Plus there are other implications as well for exceeding the HR threshold.....though these are not directly related to the MPAA.

NickNick74

Hi,

So the short answer is ‘yes’.  Pension contributions over the current MPAA (£7000) gets taxed at my HR of 40%. That’s paid via schemes pays.   Then when I do withdraw it further down the line when I retire, it will all get taxed. Despite having previously paid tax on the (£7000) annually.  

NoMore

This is the point of the MPAA to discourage you from going above it by penalising you for doing so. Its the same as the AA.

Nothing stops you going above them but doing so is a disadvantage and with Pensions become subject to IHT soon, there is very little reason to break them. Due to Employer contributions may be worth it ? I haven't worked out the figures.