Bonus sacrifice and exceeding annual allowance

IamWood

The company's bonus is coming in February, and I'm tempted to put the entire amount into my pension, even though I know it will exceed my annual allowance. Is it really worth it? My bonus will be in the tens of thousands, and any advice would be appreciated.

General_Grant

How can you be allowed to exceed your annual allowance?

IamWood

The company would not mind / care. 

I think I could repay the tax when filing my tax return. The main advantages I see are:

• No National Insurance on the bonus.
• No immediate need for the money.
• My sons may qualify for larger student loans for university, as they are already on that path.

In the long run, however, I might end up paying double taxes due to the size of my pension pot.

NoMore

General_Grant said:

How can you be allowed to exceed your annual allowance?

Its not a hard cap, exceeding it just results in a AA charge.

zagfles

IamWood said:

The company would not mind / care. 

I think I could repay the tax when filing my tax return. The main advantages I see are:

• No National Insurance on the bonus.
• No immediate need for the money.
• My sons may qualify for larger student loans for university, as they are already on that path.

In the long run, however, I might end up paying double taxes due to the size of my pension pot.

NI would only be at 2% on most of it. Are you sure you'd exceed the AA with any carry forwards available? Or have you been maxing out conts in previous years?

If so whether it's worth it depends on loads of factors like your marginal tax rate now, likely rate in retirement, whether you can get the scheme to pay the AA charge etc. 

Grumpy_chap

IamWood said:

The company's bonus is coming in February, and I'm tempted to put the entire amount into my pension, even though I know it will exceed my annual allowance. Is it really worth it? My bonus will be in the tens of thousands, and any advice would be appreciated.

If you have an income that is large enough to consume your full AA (plus - presumably - any available carry forward) and still have a bonus in the order of tens of thousands, you would very probably benefit from professional advice rather than cutting corners through whatever incomplete comments can be provided from sharing on an internet forum.  At high income levels, the interrelations between tax now and tax in the future and allowances now can be complex.

kinger101

Presume you have no AA allowance left from the previous 3 years?

You need to compare the effect of the double taxation versus single.

Paying in over the AA can make sense in some scenarios. Where one would fall into the 60% marginal rate AND lose free nursery hours and tax free child care is the most obvious.

Though if you are sure you can withdraw it all at basic rate, paying 40% pension tax charge then 20% income taxes leaves you with 48 p rather the the 38 p from after 60% Income tax and 2,% NI. But this assumes you're not straddling bands.

IamWood

With the bonus, I’ll end up just crossing into the additional tax band.