Question: Annual Allowance & Annual Input Allowance

Sayr

Hi. I may decide to retire in the next 12 months. My question is around how to maximise investment into my 2024/25 SIPP, but making sure not to exceed my Annual Allowance. I am not retired, but am contributing to a public sector Defined Benefit pension and also paying into an occupational AVC through work every month as a salary sacrifice. My pension provider is working out my predicted 'Annual Input Amount' for 2024/25. Am I right in saying that the amount I can actually pay into my private SIPP in this financial year is my Annual Allowance (my gross salary) minus my Annual Input Amount (currently being estimated for 2024/25 by my DB pension provider), less the tax relief from the Government? As an example, if my local authority salary for 2024/25 is estimated to be £55k, and the Annual Input Allowance for me is estimated to be say £35k, then the difference of £20k multiplied by 0.8 (Government tax relief) would mean I could actually be able to contribute £16k into my SIPP without going over my Annual Allowance. Is this working out correct? Thanks.

NoMore

No, the Annual Allowance is nothing to do with your Gross Salary, its merely the max you can pay into pensions from all sources without occurring a charge.

For your SIPP contributions there is a separate limit due to Tax relief, whereby you are only eligible for tax relief on your relevant UK earnings.

If your salary is £35k, then I doubt very much you have to worry about the AA and instead (assuming that's your salary after the salary sacrifice to the AVC) could pay in 80% of 35k (28k) to maximise your tax relief in the SIPP.

Sarahspangles

There are two limits. Calculated differently.

You can pay up to your relevant UK earnings into a pension. If you earn £55k (surely there’s no need to estimate this at this point in the year?) then you need to take off the amount already contributed to LGPS from your pay packet to arrive at the gross amount you can pay into your SIPP. You actually transfer 80% of this amount to the SIPP as the remaining 20% is claimed from HMRC by your provider.

You also separately have an Annual Allowance of £60k this year and this is where the Pension Input Amount is needed for the calculation. Instead of subtracting your LGPS contributions from the £60k, you need to take off the larger PIA. So long as the remaining AA is more than your gross SIPP contribution, you don’t need to do more sums. If it is you need to use carry forward from previous years. If you’ve been contributing moderate amounts to a pension over the last three years you’re likely to have headroom.