Annual Pension Contribution Allowance

NoMore wrote: »

Thanks for quoting me out of context where I go on to say you need to use all of your 40k up before using carry forward.

And yes the make up of that 40k can be affected by a Pension Input Amount from a DB pension that people don't realise how big it could be. But I was trying to keep it simple. but I appreciate your more precise and expansive answer, although my answer was basically the same in that the OP can't use carryforward.

The point is that this question is asked time and time again here, and the reason is the OP has read some oversimplified rubbish which attempts to combine two unrelated limits into one, like "the limit is £40k or your earned income whichever is lower". They then get confused by carry forwards, pension input amounts etc as they apply to the annual allowance not the earned income tax relief limit.

If you want to simplify it for the likes of the OP on around £20k salary, just tell them to completely ignore the annual allowance. It's not relevant, unless very odd circumstances. Their only constraint in the earned income limit. So they can ignore £40k, they can ignore pension input amounts, they can forget carry forwards, they can ignore employer contributions, all those are features of the annual allowance, not the earned income tax relief limit.

So, for the benefit of the OP, if say you earned £23k and contributed £3k to your employer's scheme, resulting in taxable income of £20k, then £20k gross is what you can pay into your SIPP. You pay 80% of this and the SIPP provider claims the 20% tax relief, so the max you can pay in is £16k and the SIPP provider will claim the £4k tax relief.

Cheshiregrin wrote: »

Thanks. This is very well explained and I have been struggling with getting the correct info. for a while now.
I am in the teachers pension (DB) and this is how I have calculated my maximum extra payment into an AVC over and above the usual pension to the teachers pension.

I earn £38500 p/y and contributed £11k (my PIP from TP for last year)

PIP is Pension Input Period, you mean PIA, Pension Input Amount

to the teachers pension, resulting in taxable income of £27,500.

As correctly pointed out above, in a DB scheme the PIA has nothing whatsoever to do with your taxable income. Your taxable income is your income minus your contributions to the DB scheme, as your P60 should show.

£27,500 gross is what I can pay into my SIPP/AVC. [This is under the £40000 threshold so is ok].

No...that's not the max.

I pay 80% of this and the SIPP/AVC provider claims the 20% tax relief, so the max I can pay in is £22,000 and the SIPP/AVC provider will claim the £5,500 tax relief.
Total going towards my pension and SIPP/AVC in the year would be £11k + £27,5k = £38,5k but I will only have paid £4k (my TP contribution) + £22k = £26k, the other £12,5k coming from the PIP and tax relief.
I think this is correct now (please let me know if its not) so thanks again for your clear explanation.

No it's not. You seem to have misunderstood.

Your taxable income is £38500 minus your contributions £4k = £34500. That's what your P60 and last payslip of the tax year should show (adjusting for any payrises in year, overtime etc).
As I said above, you need to look at the two pension contribution limits completely separately.

For the purposes of the annual allowance, your PIA is £11k (note this can vary depending on inflation, payrises and if you've got a final salary element a payrise can cause a massive spike in the PIA, but assume it's £11k).

That leaves you £29k remaining annual allowance plus any carry forwards you have. If the PIA has been £11k for the last few years, and no AVC/SIPP contributions etc, you will have loads of carry forwards, about £29k times 3. So you could have about £116k available annual allowance this year. You can check on an annual allowance calculator eg HL's one: https://www.hl.co.uk/pensions/contributions/carry-forward-rule/annual-allowance-calculator


If so, the annual allowance isn't an issue for you this year. Your constraint is the other completely separate limit, the earned income tax relief limit which does not use PIAs, and does not allow carry forwards. This is your taxable income, so you could put all your taxable income into a SIPP, ie £34500 gross into a SIPP, £27600 net.

But you couldn't do that long term, as you'd run out of carry fowards after a few years, as the PIA of £34500 plus £11000 = £45500 exceeds the annual allowance if you have no carry forwards left. Without carry forwards, you are limited by the annual allowance, since you only have £29k spare after the £11k PIA to the DB scheme, so that is your max contribution as that's less than the earned income limit (£34500). So you'd only be able to pay £29k gross, ie £23200 net into a SIPP.

Sorry if it's hard to understand but if you're going to make big pension contributions it's essential you understand all this rather than rely on oversimplified rubbish which tells you as you earn under £40k you can't use carry forwards, the annual allowance doesn't apply, you can put the max of £40k or your earnings into a pension etc. You're the perfect example of why this oversimplified rubbish is wrong.