Paying a lump sum into my pension

VincentHanna

Hi folks, I'm planning to top up my workplace pension by £50K. I'm wondering what tax relief I would get on this. Few things - I live in Scotland - the higher rate of income tax is earnings above £43K (42% above this). My salary is £42K per year. I also have other income from savings which provides about 20K in additional income. This means effectively I am a higher rate tax payer as my total income is £62K per year. 

If I pay in a lump sum of £50K will I get tax relief @ 40% or 20%? 

Thanks.

Dazed_and_C0nfused

VincentHanna said:

Hi folks, I'm planning to top up my workplace pension by £50K. I'm wondering what tax relief I would get on this. Few things - I live in Scotland - the higher rate of income tax is earnings above £43K (42% above this). My salary is £42K per year. I also have other income from savings which provides about 20K in additional income. This means effectively I am a higher rate tax payer as my total income is £62K per year. 

If I pay in a lump sum of £50K will I get tax relief @ 40% or 20%? 

Thanks.

How can you add £50k (or £62.5k if you mean £50k net) with earnings of £42k?

NB.  That isn't an affordability question, it's about the rules for maximum contributions.

MallyGirl

you cannot pay in more than you earn so your limit is £42K. savings interest doesn't count for this.

Sam_666

Maybe OP is thinking about last 3y carry-over?
How  much has already been contributed to pension?
Realy need much more info then posted.
On  another  note, OP £444,444 in savings is super cash heavy status. Unless planning to buy house, I would never keep that much in cash.

af1963

You can make up your total pension payments ( your personal payments, which include any made through your work pension, but exclude any employer contributions/salary sacrifice ) so that the total gross value is 100% of your earned income ( salary and work related benefits).

Assuming you'd already paid personal contribs of £12k ( as an example only), this allows you to contribute a further £30k gross extra this tax year. ( Pay in £24k and get tax relief at 20% added to make it up to £30k). 

This  £30k extends your basic rate tax band by £30k. So you could earn up to £73k and pay tax at basic/intermediate rate. ( £43k Scottish limit, plus your extended £30k).  That's how higher rate taxpayers get the additional "40% relief".  They only get the benefit to the extent that their income actually covers it.  In your case, with income of £62k, you'd effectively be getting 42% tax relief (Scotland)  on the amount between 43k and 62k, and 20% relief on the rest of the pension contribs.

To maximise the benefit, you'd put just enough extra into the pension each tax year to extend your basic rate band to just above your total taxable income. ( about 20k gross extra)  Then you get taxed at 21% instead of 42% on your income over £43k, saving 21%, plus you get the 20% tax relief added by the pension provider. 

For Scottish 21% taxpayers, there's a 'missing' 1% that you've paid in tax but not had refunded in any way. It's possible to claim that back from HMRC.
https://www.litrg.org.uk/news/scottish-taxpayers-dont-miss-out-extra-tax-relief-your-pension-contributions

Also - worth doing what you can about whatever generates that "income from savings" to get as much of it as possible into your pension or an ISA, so that it doesn't incur income tax in future years. 

af1963

Sam_666 said:

Maybe OP is thinking about last 3y carry-over?

Can't use carry forward to pay in more than your earned income.

Linton

Sam_666 said:

Maybe OP is thinking about last 3y carry-over?
How  much has already been contributed to pension?
Realy need much more info then posted.
On  another  note, OP £444,444 in savings is super cash heavy status. Unless planning to buy house, I would never keep that much in cash.

Carry over is only available for the £60K Pension allowance which is completely separate to the earnings limit.  The earnings limit does not permit carry over. Since the OP only has £42K earnings the pension allowance is probably  irrelevent.

Albermarle

af1963 said:

Sam_666 said:

Maybe OP is thinking about last 3y carry-over?

Can't use carry forward to pay in more than your earned income.

This misunderstanding of carry forward rules seems to crop up in one thread or another nearly every day !

VincentHanna

Thanks for the replies. 

Additional information - the 50k I'm thinking of putting into my pension comes from savings I already have. If my income from this year is 62k, 42 from salary and 20k from savings interest, what tax relief can I expect on a 50k lump sum into my pension? 

gm0

You are subject to the earnings limit.  Only contributions against "pensionable earnings" get tax relief.  Moving savings (capital) into a pension outside of this does not. 

Interest on savings isn't pensionable income either.  Absent tax relief on the way in - the pension restrictions on the wrapper vs S&S ISA (access age mainly) make it an unusual thing to do.

So you are limited each year on how much will squeeze in.  Other capital could of course be in a stocks and shares ISA in similar investments with no income tax or CGT (at the moment). But no tax relief.  Separate allowance each year though.

VincentHanna

For the past 3 years my pension contributions have been roughly 5 k per year so think I'm right in saying I can put in up to £60k per year - 5k for each year. Effectively meaning I could put in 55k x 3 if I wanted to? Or is it based on your salary, ie, 42k max for every year (based on max salary of 42k)