Advice sought - pension contributions over £60,000 per year limit - how to manage it?

Gaberdeen

Hi

Recently received notice that I'm in line for a pay increase and have set about working out how much I can safely afford to increase my pension contributions - however I've just realised that it's possible that within the next year (when bonuses etc are paid), I'll be over the £60,000 limit and have no idea how to properly plan for this.

My working assumption was that I can clawback previously unused tax allowance from previous years - however this needs to be done via self-assessment and moreover will only last 3 years assuming I maximise the full £60,000 per year going forward

So beyond that I'm asking myself what is the most tax efficient option?

1. Is it better to simply bank a hard £60,000 in the pension and be taxed on the excess cash that I'll receive through payroll? 

2. Or would it save more tax by salary sacrificing down to NMW - pushing pension contributions above £60k and dealing with tax on it at the end of the year - possibly offsetting it against losses etc?

On the face of it, option 1 means I'll only pay 21% on the excesses produced by limiting my pension contributions

What I really need to know is, is the tax applied to excess pension contributions more or less than than 21%?

All things being equal, it should make no difference, but the last thing I want to do is make an assumption and get it wrong.

Thanks in advance

zagfles

Generally it's not a good idea to exceed the AA inc any carry forwards, but using carry forwards doesn't require you to do anything other than make sure you know how much you have, it's only if you exceed the available AA inc CF that you need to declare it on your tax return. Just keep records in case HMRC query it. 

You can use a carry forwards calculator like the HL one Pension Carry Forward & Annual Allowance Calculator | HL 

But wait till the budget next week before making any decisions, things could change!

Marcon

zagfles said:

Generally it's not a good idea to exceed the AA inc any carry forwards, 

That's going to baffle a lot of people. Maybe explain why that's the case; and when it is 'a good idea'?

Dazed_and_C0nfused

Gaberdeen said:

Hi

Recently received notice that I'm in line for a pay increase and have set about working out how much I can safely afford to increase my pension contributions - however I've just realised that it's possible that within the next year (when bonuses etc are paid), I'll be over the £60,000 limit and have no idea how to properly plan for this.

My working assumption was that I can clawback previously unused tax allowance from previous years - however this needs to be done via self-assessment and moreover will only last 3 years assuming I maximise the full £60,000 per year going forward

So beyond that I'm asking myself what is the most tax efficient option?

1. Is it better to simply bank a hard £60,000 in the pension and be taxed on the excess cash that I'll receive through payroll? 

2. Or would it save more tax by salary sacrificing down to NMW - pushing pension contributions above £60k and dealing with tax on it at the end of the year - possibly offsetting it against losses etc?

On the face of it, option 1 means I'll only pay 21% on the excesses produced by limiting my pension contributions

What I really need to know is, is the tax applied to excess pension contributions more or less than than 21%?

All things being equal, it should make no difference, but the last thing I want to do is make an assumption and get it wrong.

Thanks in advance

If you stay within all relevant limits why do you think a Self Assessment return is required 🤔

Not sure what you really mean by clawback but you can only ever carry forward unused annual allowance.  This enables additional contributions to be made in the current tax year and if any tax relief is due then it relates to the current tax year, not any previous tax year.

1.  Depends on what you want to achieve.  But as you recognise that your ability to use unused annual allowance is going to be limited going forward then making use of it whilst you can seems something at least worthy of consideration.

2.  What are these losses and where do you think they are relevant with regard to pension contributions?

Lorian

Marcon said:

zagfles said:

Generally it's not a good idea to exceed the AA inc any carry forwards, 

That's going to baffle a lot of people. Maybe explain why that's the case; and when it is 'a good idea'?

Not sure about a good case, but bad case, Double taxation, having to do mandatory self assesment to pay the pensions saving charge if it's over £2k. Money you could be being taxed on when withdrawing too.

Aylesbury_Duck

I've gone slightly over the allowance for the last two years, having been caught out by an LGPS revaluation in both years.  It's caused no problem.  I've paid the small charge (£470 one year, £630 the other) to HMRC after self-assessment generates the debt, and that's been it.

My view is that it's better to overshoot slightly than to leave allowance unused, because you never know if the rules of carryover will remain, change or be removed.