confused about what I can pay into my personal pension

lastminuteinvestor123 · 19 March at 3:30PM

Hi there

I can't quite get my head around what I'm allowed to pay into my personal pension. I have just consolidated two previous employer pensions into one self-managed one with Vanguard.

This current tax year, I earned a total of just over £5k which I paid directly into my employer pension scheme at the time, which became just over £7k after tax relief and employer contributions.

I also have just under £50k in an equity investment that I bought with funds saved from other sources (not employment). I am trying to understand if I am allowed to sell that investment and then put the proceeds into my personal pension. Am I right in thinking that's allowed, and if so, what are the tax implications (other than any CGT on selling the investment)?

Many thanks - my brain has stopped working!

TheSpectator · 19 March at 3:33PM

You may have already paid in too much with earned income of £5000. The max you can pay including the tax relief is £5000 so a net contribution of £4000 is what you should have paid.

Your investments are irrelevant to this.

lastminuteinvestor123 · 19 March at 3:35PM

TheSpectator said:

You may have already paid in too much with earned income of £5000. The max you can pay including the tax relief is £5000 so a net contribution of £4000 is what you should have paid.

Your investments are irrelevant to this.

Sorry, I don't understand what you mean.

TheSpectator · 19 March at 3:44PM

lastminuteinvestor123 said:

TheSpectator said:

You may have already paid in too much with earned income of £5000. The max you can pay including the tax relief is £5000 so a net contribution of £4000 is what you should have paid.

Your investments are irrelevant to this.

Sorry, I don't understand what you mean.

Based on your other threads you want to sell shares to fund your pension. I'm saying you appear to have already exceeded the max that you can pay in this year and get tax relief on.

Of the £7000 in your pot, how much was your contributions, how much was the tax relief added and how much were employers contributions?

dunstonh · 19 March at 3:59PM

This current tax year, I earned a total of just over £5k which I paid directly into my employer pension scheme at the time, which became just over £7k after tax relief and employer contributions.

Pension contributions are gross, not net. The allowances are on the gross contribution.

Tax relief is a relief, not a bonus. i.e. its a reduction in what you pay.

i.e. £5000 would be the pension contribution if you paid £4000.

So, if you earned £5000, then the maximum pension contribution is £5000, which would cost you £4,000.

Employer contributions can go above what your earn.

lastminuteinvestor123 · 19 March at 4:01PM

TheSpectator said:

lastminuteinvestor123 said:

TheSpectator said:

You may have already paid in too much with earned income of £5000. The max you can pay including the tax relief is £5000 so a net contribution of £4000 is what you should have paid.

Your investments are irrelevant to this.

Sorry, I don't understand what you mean.

Based on your other threads you want to sell shares to fund your pension. I'm saying you appear to have already exceeded the max that you can pay in this year and get tax relief on.

Of the £7000 in your pot, how much was your contributions, how much was the tax relief added and how much were employers contributions?

Thank you for replying. Do you know if I'm actually allowed to pay that unearned money into my pension - even if it doesn't attract tax relief? If so, is there any benefit to me doing so once I reach pension age? Thanks

TheSpectator · 19 March at 4:19PM

lastminuteinvestor123 said:

TheSpectator said:

lastminuteinvestor123 said:

TheSpectator said:

You may have already paid in too much with earned income of £5000. The max you can pay including the tax relief is £5000 so a net contribution of £4000 is what you should have paid.

Your investments are irrelevant to this.

Sorry, I don't understand what you mean.

Based on your other threads you want to sell shares to fund your pension. I'm saying you appear to have already exceeded the max that you can pay in this year and get tax relief on.

Of the £7000 in your pot, how much was your contributions, how much was the tax relief added and how much were employers contributions?

Thank you for replying. Do you know if I'm actually allowed to pay that unearned money into my pension - even if it doesn't attract tax relief? If so, is there any benefit to me doing so once I reach pension age? Thanks

You would need to ask your pension provider if they accept contributions on which tax relief won't be claimed. Most won't.

If there is no tax relief to be got then there is no real difference between a pension or ISA for the investment, an ISA would be more flexible and totally tax free.

lastminuteinvestor123 · 19 March at 5:14PM

TheSpectator said:

lastminuteinvestor123 said:

TheSpectator said:

lastminuteinvestor123 said:

TheSpectator said:

You may have already paid in too much with earned income of £5000. The max you can pay including the tax relief is £5000 so a net contribution of £4000 is what you should have paid.

Your investments are irrelevant to this.

Sorry, I don't understand what you mean.

Based on your other threads you want to sell shares to fund your pension. I'm saying you appear to have already exceeded the max that you can pay in this year and get tax relief on.

Of the £7000 in your pot, how much was your contributions, how much was the tax relief added and how much were employers contributions?

Thank you for replying. Do you know if I'm actually allowed to pay that unearned money into my pension - even if it doesn't attract tax relief? If so, is there any benefit to me doing so once I reach pension age? Thanks

You would need to ask your pension provider if they accept contributions on which tax relief won't be claimed. Most won't.

If there is no tax relief to be got then there is no real difference between a pension or ISA for the investment, an ISA would be more flexible and totally tax free.

Thank you. Yes, I would put it all in an ISA if I could, but as the limit is £20k I'm thinking the remaining £30k might be better off in pension, as at least it will be subject to the 25% tax free lump sum. Have I got that right? Thanks for your time!

eskbanker · 19 March at 5:22PM

lastminuteinvestor123 said:
Yes, I would put it all in an ISA if I could, but as the limit is £20k I'm thinking the remaining £30k might be better off in pension, as at least it will be subject to the 25% tax free lump sum. Have I got that right?

No! If your £30K is money that's already been taxed (when originally earned), then if you pay it into a pension (without tax relief) and are then taxed on 75% of it on the way out again, you're very much down on the deal....

lastminuteinvestor123 · 19 March at 6:01PM

eskbanker said:

lastminuteinvestor123 said:
Yes, I would put it all in an ISA if I could, but as the limit is £20k I'm thinking the remaining £30k might be better off in pension, as at least it will be subject to the 25% tax free lump sum. Have I got that right?

No! If your £30K is money that's already been taxed (when originally earned), then if you pay it into a pension (without tax relief) and are then taxed on 75% of it on the way out again, you're very much down on the deal....

It wasn't taxed when originally earned (divorce settlement). So am I right in thinking it'll be better for tax to put it in the pension?

EthicsGradient · 19 March at 6:21PM

This may depend on when you withdraw it, and what your other income is at that time. If your employment income remains at £5k, and you aren't receiving any other pension at the time, you may be able to withdraw £7,570 a year before you start paying tax on it. But if, for instance, you wait until you're also receiving the state pension, the difference between your 'earned income' (which includes pensions) and the £12,570 Personal Allowance would be much smaller.