Over annual allowance

Bemr

I contribute to my employers pension scheme via salary sacrifice. For the last few years I’ve been fully utilising the £60k annual allowance so have very little carry over available. I’ve just realised that my final paycheque for this tax year will take me over my permitted annual allowance by about £2k. Although my employer allows adjustments to pension contributions on a monthly basis I’ve unfortunately missed the cutoff for this month.

As I’ve not actually been paid yet is there anything I can do to mitigate the impact before that happens?

Aylesbury_Duck

Is it a problem?

I routinely (just) exceed the allowance, because part of my allowance is taken up by the LGPS and the value of the year's contributions gets revalued with an inflationary uplift after year-end, which takes me over the £60k. When the uplift was high a few years ago I overshot by a couple of thousand. Once I get the statement through from my LGPS provider (usually in September), I tell HMRC and pay the tax charge on the excess. If you don't have a DB scheme to complicate things, then you'll know your excess and can tell HMRC straight away.

I figure it's better to slightly overshoot than to leave allowance unused.

Bemr

It’s a problem in that I’ll end up paying tax on my excess contribution twice, once on the way in now and again on the way out when I retire. So I’ll potentially get 40% deducted twice over.

Also, paying the tax charge means the money is locked up in my pension for the next 10-20 years but without any uplift, so I might as well have just had it now.

For those reasons I’d prefer to be slightly under my allowance rather than over.

Unless Ive misunderstood something about how this works?

Aylesbury_Duck

I don't think your first point is correct. As I understand it (happy to be corrected), the charge on the excess is designed to neutralise the tax relief you received on the way in. In other words, you won't be taxed on the way in, you'll get tax relief on the excess going into your pension which is 'cancelled out' by the tax charge but crucially, the contribution and the relief will go on growing, tax-free, in your pension.

On your second point, why wouldn't it have any uplift? You won't get relief added the way you would if you added money to a SIPP, but you've had the relief because your employer has paid the full amount in and it hasn't been subject to tax or NI. You'll get "uplift" from growth of that £2k over time.

As I see it, your employer will put £62k into your pension and you will have received 40% tax relief because that money never hits your payslip. You would be charged 40% of the £2k excess which you'd have to pay now, but that £2k will go on growing inside your pension alongside the £60k that went in with it.

To answer your original question, I don't think there is anything you can do about it anyway if you've missed the payroll cut-off. You can't remove contributions you've already made.

Bemr

I think I understand what you’re saying but I’m looking at it a little differently.

The HMRC website says I can either ask my pension provider to pay the tax charge (which means there’s no uplift, and I’ll be taxed again on that contribution on the way out too) or I can pay it myself (which also means I didn’t get any uplift because my contribution has immediately cost me more than what I put in).

Whatever growth I get on it within the pension is going to be taxed as income when I eventually withdraw it so I don’t see how that’s more tax efficient than investing the excess in a GIA or ISA instead (even if I have to pay some CGT).

Marcon

The HMRC website says I can either ask my pension provider to pay the tax charge (which means there’s no uplift, and I’ll be taxed again on that contribution on the way out too) or I can pay it myself (which also means I didn’t get any uplift because my contribution has immediately cost me more than what I put in).

Contributing £2,000 by salary sacrifice gives you a 40% tax saving + an NI saving. If you pay the tax charge yourself, it'll simply mean 'paying back' the tax saving - so cost neutral in tax terms, but you'd keep the NI saving, so how can it 'immediately cost more' than you put in?

Unless you'll hit the LSA, not all the pension will be taxed as income - 25% of any drawdown will be tax free.

DRS1

Have you actually worked out how much annual allowance you can carry forward from previous years? You say you have been using up £60k for a few years but how many is a few? 1 2 3 or 4?

Oh and just remember that the annual allowance for 22/3 was £40k not £60k.

If you are over and are as worried about it as your posts suggest then why not get on to your firm's payroll dept and see if they can do anything about it - manually override the cut off date perhaps and adjust your salary sacrifice now?

Aylesbury_Duck

https://forums.moneysavingexpert.com/discussion/comment/81926618#Comment_81926618

As Marcon says, you're forgetting the NI saving which is a nice benefit of the salary sacrifice process.

I think what you've read on the HMRC website is what's called "Scheme Pays", whereby the tax charge can be deducted from your pension scheme. I have that option with my LGPS but I choose to pay the tax charge with cash today, rather than deduct from my pension.

You've used "uplift" a few times. What do you mean by it? I think you're misunderstanding how tax relief works. If you pay £2000 into a SIPP, the SIPP provider adds the tax relief of £500 (i.e. at the basic rate) and as a higher-rate taxpayer it would be up to you to claim the additional tax relief from HMRC. That £500 might be what you consider to be "uplift"? In your case, your pension contributions are made by salary sacrifice. What that means is that you have agreed to take lower pay and that your employer will make pension contributions in lieu of that. There is no "uplift" to the £60k because it's already benefitted from tax relief.

e.g. Suppose your salary was £100k and you arrange with your employer to make £60k of pension contributions. Your taxable (and NI-able) salary is therefore £40k. You don't get any "uplift" on the £60k your employer has put in on your behalf because you've already had tax relief on it - it hasn't been subjected to tax or NI deductions.

As to your last point, as Marcon says, you seem to be forgetting that 25% of whatever you take in retirement won't be taxed, and if you manage your pension withdrawals carefully you may be able to ensure you never pay 40% tax. And if you're in the fortunate position of knowing you will have to pay higher-rate tax throughout some or all of your retirement, well…why are you worrying about a small tax charge on £2000 now?

Bemr

https://forums.moneysavingexpert.com/discussion/comment/81926696#Comment_81926696

Yes I have worked out how much AA and carryover I have left by using the calculator on the HMRC website and it told me I’ll be £2k over. I’ve been maxing it since before the AA increased from £40k to £60k.

I already asked my employer if there’s anything they can do and they said it’s too late, the system doesn’t permit any changes after the monthly cutoff.

If I’ve given the impression that I’m extremely worried then that’s a misrepresentation, it’s more that I’m annoyed I didn’t plan ahead and got caught out. I just want to be confident about what my options are.

Bemr

Ill

https://forums.moneysavingexpert.com/discussion/comment/81926749#Comment_81926749

By uplift I just meant the difference between the money I would have now vs the increase in my pension balance. I understand the difference between salary sacrifice and a SIPP where I have to reclaim some tax myself, I’ve done both in the past.

If I assume most of the NI saving on the excess is at the 2% rate and I pay the tax charge myself then each £100 excess has cost me £98 (£58 of take home pay + £40 of tax charge). When I take the pension I’d pay at least £15 tax in the best case scenario (assuming 25% tax free and 20% of £75 in basic rate tax) so I get back £83 in 10-20 years time, which is less than it cost me now. (I’m ignoring growth because I’ve assumed I could invest it outside a pension and achieve similar growth). It’s possible I’ll be over the LSA and/or in higher rate tax when I retire so would get back even less. If I’ve miscalculated please let me know.

I realise these are not significant sums of money in the greater scheme of things but if I’m going to play the game I want to do it right.

Marcon

You're missing the point that you still have each £100 overpaid in your pension and need to set that off against your 'loss' of take home pay.