Help needed - max amount I can put into pension

TheSpectator

ijholdie said:

TheSpectator said:

You are not going to get 40% tax relief on £90k income if you did not pay 40% tax on all that income....which you won't have.

@TheSpectator can you explain/elaborate please? I am a PAYE higher rate income tax payer, are you saying that I only get the 40% relief above £50K threshold, or is it more complex than that?

Exactly that, tax relief on pensions is generous but not that generous - you can only get 40% relief on the amount of income charged to 40%, if you choose to pay more you will get the standard basic rate of 20%.

kempiejon

But you get the 20% tax relief on the £12500 you didn't pay 20% tax on? Like the £720 for non waged.

MeteredOut

ijholdie said:

@PootleF many thanks, I really appreciate your reply. Can I ask a couple more questions...

1. Is the order in which I use the annual allowance/carryover important ie. do I have to use ALL of the allowance from the current tax year first, and then use up the carryover starting with the oldest carryover year (21-22)?

Not sure anyone has answered this yet. Yes, you have to use the current years allowance before you can use any carry forward, then you can use the allowances from earliest year where you have some available to carry forward.

https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/carry-forward

PootleF

Given that you pay a decent amount of 40% tax, and as others have explained you only save 40% tax on the bit that you have paid it on, I don’t understand the rush to put this into your pension. Sure you’ll save 20% tax on the rest, but you’ll also pay 20% on most of it when you take it out. 

It depends how much you have inherited, but why don’t you drip it into your pension over a longer period, just using the 40% taxed bit? In the meantime max out this year and next year ISA allowance for you (and for your spouse too if you have one) and in savings accounts or other investments

ijholdie

@PootleF many thanks. I will try to drip feed some of the money into the pension in slower time, and will definitely be taking advantage of ISA allowances etc, just wanted to use up this year's pension allowance and some of the carryover from 21-22 before it goes.

I emailed my pension provider with a view to asking about making a one off payment (using the example - max payment this year would have been £90K gross). However, I had a reply from the provider, and I was a bit confused about one bit...

"We will apply basic rate tax relief at 20% to your contribution and this also is included in your annual allowance. If you are a higher rate tax payer, you will need to claim the additional directly via HMRC yourself
"

Does that mean that the one off payment I make to the pension provider has to be reduced to take account of the tax relief they are going to add (I am getting a bit confused because all of the calculations were based on gross figures, and now the pension provider is adding 20% tax relief onto the payment I am making to them. 

Sarahspangles

ijholdie said:

@PootleF many thanks. I will try to drip feed some of the money into the pension in slower time, and will definitely be taking advantage of ISA allowances etc, just wanted to use up this year's pension allowance and some of the carryover from 21-22 before it goes.

I emailed my pension provider with a view to asking about making a one off payment (using the example - max payment this year would have been £90K gross). However, I had a reply from the provider, and I was a bit confused about one bit...

"We will apply basic rate tax relief at 20% to your contribution and this also is included in your annual allowance. If you are a higher rate tax payer, you will need to claim the additional directly via HMRC yourself
"

Does that mean that the one off payment I make to the pension provider has to be reduced to take account of the tax relief they are going to add (I am getting a bit confused because all of the calculations were based on gross figures, and now the pension provider is adding 20% tax relief onto the payment I am making to them. 

The gross you can contribute is after the tax relief has been added. So for a max payment of £90k you contribute £72k and the provider claims the 20% relief taking you to £90k.

If you are a higher rate taxpayer you can request a refund of tax paid via your Personal Tax Account. I did it earlier in the week, it takes 10-15 minutes. Note that this isn’t included in the gross calculation. You can only get up to the maximum higher rate tax paid e.g. if you paid £7.5k higher rate tax you get back half (40%-20%) of that.

TheSpectator

ijholdie said:

@PootleF many thanks. I will try to drip feed some of the money into the pension in slower time, and will definitely be taking advantage of ISA allowances etc, just wanted to use up this year's pension allowance and some of the carryover from 21-22 before it goes.

I emailed my pension provider with a view to asking about making a one off payment (using the example - max payment this year would have been £90K gross). However, I had a reply from the provider, and I was a bit confused about one bit...

"We will apply basic rate tax relief at 20% to your contribution and this also is included in your annual allowance. If you are a higher rate tax payer, you will need to claim the additional directly via HMRC yourself
"

Does that mean that the one off payment I make to the pension provider has to be reduced to take account of the tax relief they are going to add (I am getting a bit confused because all of the calculations were based on gross figures, and now the pension provider is adding 20% tax relief onto the payment I am making to them. 

Think you need to clarify how the existing £30k you have paid via your employment has been treated. You said you think it was salary sacrifice but was in fact that method of relief. If it was a relief at source payment this will affect any lump sum you can now pay and also affect the amount of higher rate relief.

ijholdie

@TheSpectator I can clarify that my existing regular contributions paid from my employment are made via salary sacrifice.

I have amended my example slightly, and I am hoping that those who have been kind enough to help me thus far, might be able to help me clarify that my assumptions are correct (or not!).

If this is the current situation...




If I was to make an additional one off payment before 5th April 2025 of £40000, to my pension provider (Pension provider would then add 20% tax relief bringing the total one off to £50000 gross). The £50000 would use up the remaining £33000 PA from this tax year, plus it would use up £17000 PA carryover from The April 2021-22 year.

Then next year's Apr 25-Apr 26 position would look like the diagram below...



So does that mean that next tax yr I would have Personal allowance of £99000 available (£33K from Apr 25-2, £0 from Apr 24-25, £40k from Apr 23-24, £26K from Apr 22-23, and zero from Apr 21-22 because that yr will be lost next year as it is outside the 3 yr carryover)? (I understand that the amount I could potentially add as another one off next yr would still be limited by the £60K income, and I also understand that this example is only using the 20% relief for the £50K gross one off payment, but I just want to check my understanding and logic is correct).

Secret2ndAccount

Yes                       

Sarahspangles

It’s preferable to use the terms ‘Annual Allowance’ and ‘Relevant UK earnings’ for these calculations. ‘Personal allowance’ usually means the £12,570 tax free allowance.

Your calculations look right, just remember you can only contribute £99k next year if your relevant UK earnings are £99k or over.