Calculating my annual allowance - savings interest? Redundancy?

What_time_is_it

I’m trying to calculate my pension annual allowance for the current tax year 2024/25. It’s made a little more complicated by the fact that I have taken redundancy during the tax year and am no longer working. I also have significant savings income this year.

i Understand that the annual allowance is £60,000 but that this is actually lower if my income is lower than that. Is that correct? My income for the tax year from work will total £35,000. Is that my annual allowance?

i also received a redundancy payment this year. Should this be included in my income for annual allowance purposes? My redundancy payment was £30,000 so was tax free. 

Additionally I will, by the end of the current tax year, receive savings interest of around £4,000. Should this also be included in my income for calculating my Annual Allowance?

i intend to set up a SIPP in February so knowing this figure is important to be able to calculate how much I can pay into it this tax year.

I’m confused on this so any thoughts or advice would be warmly welcomed!

hugheskevi

There two entirely separate limits:

(1) Annual Allowance (standard allowance is £60,000)
This is unlikely to be relevant to you unless:

• Your income is above £200,000
• You put more than £60,000 into a pension from employee, employer and tax relief combined (or if in a Defined Benefit scheme, you have a pension input in excess of £60,000)
• You have previously accessed a pension

(2) Earnings that attract tax relief
This is likely to be what limits you.

There is a list at this HMRC link. You add up your income from all the sources in this list, and that is the limit on which you can receive tax relief, subject to the Annual Allowance.

As a starter, only redundancy over £30,000 would count, and interest does not count. Hence your limit is likely to be around £35,000 from what you said.

What_time_is_it

Thanks @hugheskevi. That is so helpful.

it does sound like your second point is the one that is relevant to my situation and that I would be limited by my earnings for the year, which would be under £60,000.

From looking on the list I agree that savings interest is not mentioned so does not count, and redundancy payments up to £30k also do not count. I do not have any other income that is mentioned in the HMRC list.

So, the most I can contribute into my pensions in total this tax year would be £35,000 (my income from work during the tax year)? Does that sound correct to you?

hugheskevi

What_time_is_it said:

So, the most I can contribute into my pensions in total this tax year would be £35,000 (my income from work during the tax year)? Does that sound correct to you?

Yes, remember to take into account pension payments made during work.

What_time_is_it

Thanks.

Yea - pension payments! I know how much went into a DC pension (my contributions only, there was no employer contributions)), and I have a rough idea of the yearly total that my DB pension increased by (both my previous employer and I contributed to this one during this tax year and I’ve used their calculator to estimate the “value” for the year).

I also have a dormant pension from a former employer. No contributions went into it, but it is a DB pension so goes up each year in line with their inflation rules. Should I account for this? Or do I ignore thia pension as there were no contributions this year?

hugheskevi

What_time_is_it said:

I also have a dormant pension from a former employer. No contributions went into it, but it is a DB pension so goes up each year in line with their inflation rules. Should I account for this? Or do I ignore thia pension as there were no contributions this year?

Ignore it, for Annual Allowance it will be subject to the deferred member carve out, and as no contributions went into it there is nothing relevant to earnings that attract tax relief.

QrizB

Did you get any taxable redundancy payments? Or did your redundancy payments happen to be exactly £30k?

What_time_is_it

Amazing. Thank you so much for your clear answers to my questions. I have two more I’m afraid…

if I do accidentally go over my Annual Allowance this year (because of the estimate on my DB pension for the year), what happens then? Is there a fine? Or do I just have to repay the tax back for the amount over my annual allowance? And how is this collected by HMRC?

Finally, for 2025/26 if I do not work at all, and only receive income from savings interest, dividends, and sales of personal items, is the most I can pay into a SIPP capped at £2,880?

What_time_is_it

QrizB said:

Did you get any taxable redundancy payments? Or did your redundancy payments happen to be exactly £30k?

My redundancy was around £31k. I included the £1k as part of my £35,000 income for the 2024/25 year. So I basically separated out the £30k tax free element.

hugheskevi

What_time_is_it said:

if I do accidentally go over my Annual Allowance this year (because of the estimate on my DB pension for the year), what happens then? Is there a fine? Or do I just have to repay the tax back for the amount over my annual allowance? And how is this collected by HMRC?

Finally, for 2025/26 if I do not work at all, and only receive income from savings interest, dividends, and sales of personal items, is the most I can pay into a SIPP capped at £2,880?

Assuming you have not accessed a pension previously and so are not subject to Money Purchase Annual Allowance, and that your income does not exceed £200,000 and so you are not affected by the tapered annual allowance, your allowance would be £60,000.

If you went over £60,000 you would look to see if you have unused allowance from the past 3 years to carry forward. If unused allowance is available, that increases your annual allowance from £60,000 to whatever the amount of £60,000 plus unused allowance from last 3 years is.

If despite carry forward you still exceeded the limit, you then pay tax at your marginal rate on the amount by which you have exceeded the limit plus carry-forward. This is done via self-assessment.

The most you can pay into a SIPP when you have no earnings that attract relief is £3,600 (gross). To do this, you would make a payment of £2,880 (net) which is grossed up for basic rate relief by the provider.

Note that all calculations for annual allowance and earnings that attract tax relief should be calculated on a gross basis.

QrizB

What_time_is_it said:

QrizB said:

Did you get any taxable redundancy payments? Or did your redundancy payments happen to be exactly £30k?

My redundancy was around £31k. I included the £1k as part of my £35,000 income for the 2024/25 year. So I basically separated out the £30k tax free element.

That's OK then, just wanted to check!