Paying a lump sum into my pension

Sarahspangles

If you are receiving £20k of savings interest on top of salary you are presumably paying higher rate tax, which will be collected from salary through your PAYE notice of coding. So if you contributed a significant lump sum to your pension, HMRC would give you 20% relief and at the same time your 20% tax band would increase to cover the income currently subject to higher rate tax. There’s a new online process to reclaim the higher rate tax paid, through your Personal Tax Account. You get back the 20% (40%-20%) on any higher rate tax actually paid.

VincentHanna

Thanks, am I right with my second bullet point about claiming back 3 years worth of tax relief and the amount I could claim? 

Thanks

Sarahspangles

VincentHanna said:

Thanks, am I right with my second bullet point about claiming back 3 years worth of tax relief and the amount I could claim? 

Thanks

No, you’re not. If you had enough earnings to contribute over £60k this year then you could use carry forward to exceed the £60k Annual Allowance. But there’s no way to go back and get tax relief based on previous years’ earnings.

VincentHanna

·        So from what I can gather I can only get the tax relief for the year up to my salary earnings (£42K) for the current year? So if I have paid in 10K in pension contributions and my salary is 42K I can top up my pension by 32K from savings I have and get 20% tax relief? Do I need to take into account employer pension contributions? In other words, say they paid in 2K (employer) and I paid in 10K over the year in contributions, I could only top up pension by 30K for that year?

Cobbler_tone

VincentHanna said:

Do I need to take into account employer pension contributions? 

Yes, total contributions.

Sam_666

HMRC’s definition ‘Earnings that attract tax relief’ includes:

•  Income from employment, for example pay, wages, bonus, overtime or commission.  This includes, among others:

            o   the part of a redundancy payment over the £30,000 tax exempt threshold

            o   taxable benefits in kind

            o   profit related pay

            o   Statutory Sick Pay

            o   Statutory Maternity Pay

            o   Permanent Health Insurance (PHI) payments paid by an employer

            o   Government Securities

            o   units in a unit trust

            o   partnership shares in a share incentive plan

• Self-employed income
• Income from a UK and/or EEA furnished commercial holiday lettings business
• Patent income, where the individual is receiving royalties for an invention

VincentHanna

·        Pension contributions for 24/25 will be – me – 7811, employer – 2112

·        42612 salary – take away 7811 – 2112 = 32689 for this year

·        So based on this I am going to pay in 50K over 2 tax years – 25K to top up in 24/25 and another 25K to top up in 25/26. Based on this I can expect 20% tax relief on 25K in 24/25 and 20% tax relief in 25/26. So adding 5,000 in tax relief for each financial year.

QrizB

Cobbler_tone said:

VincentHanna said:

Do I need to take into account employer pension contributions? 

Yes, total contributions.

As I understand it, employer contributions don't receive tax relief and don't count towards the £42k.

They do count towards the £60k annual allowance but (in light of the previous posts) that's unlikely to restrict the OP.

Cobbler_tone

QrizB said:

Cobbler_tone said:

VincentHanna said:

Do I need to take into account employer pension contributions? 

Yes, total contributions.

As I understand it, employer contributions don't receive tax relief and don't count towards the £42k.

They do count towards the £60k annual allowance but (in light of the previous posts) that's unlikely to restrict the OP.

Correct. The calculations above are incorrect. So if the salary is £42,612 and employee contribution is £7,811 and there are no other taxable benefits (e.g. car or healthcare) or salary sacrifice (e.g. share schemes) then the gross taxable amount is £34,801. Assuming it is via salary sacrifice the relief is given at source.
In terms of contribution towards annual allowance it is £9,923. 

af1963

Without wanting to get repetitive, if you're trying to get the max possible value from your £50k, I think the approach that I suggesed in an earlier post is probably the best way to do it.  Assuming you'll continue with similar salary and savings interest in the next couple of years ...

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. 

If you do this over three tax years, putting in £16k each year and getting it topped up to £20k, that means you get the tax relief top up PLUS the higher rate tax saving, on all of the £50k.

If you put in any more than that in any year - even though you're allowed to do it - the extra amount beyond £20k will only get the basic 20 % topup, because your taxable income will already all be within the (extended by £20k) basic rate band.

Three tax years could mean now, April, and next April, so doesn 't need to take too long.