Pension Input Amount and 60% marginal tax rate

You're allowed to carry forward unused annual allowance from the past three years.

The annual allowance charge is calculated by adding the excess pension contributions to your taxable income, so you can save NI but not income tax on the portion subject to the charge. But see later answers, it's charged at marginal rate so it doesn't cost you a lower personal allowance and scheme pays can reduce the out of pocket cost.

You can try to deliberately accumulate some annual allowance to carry forward by making low pension contributions for up to three years then high on the fourth, so you avoid the personal allowance reduction some years.

On my reading of the facts given, you only want to put a further £1k into the pension, for 60% effective tax relief on that.

Anything you contribute above £40k is simply added to your tax income on your return, and so you would be paying an effective 60% tax on pension contributions above £40k. Don't forget that you will then also pay tax on withdrawals, an effective 15% if basic rate and below the LTA, 30% if higher rate and below. The cumulative rates on these contributions is likely to come out to 75-90%, so definitely not worth it.

Remember that your tax rate encompasses not just earnings but everything, so you could actually be past the 60% band, or maybe into the 45% band, so numbers could change. In general though, the most common occasions where it is worthwhile breaking the pensions annual allowance is where it allows you to capture a worthwhile employer match. That doesn't sound like the case here.

When you worked out that you have no AA to carry forwards, did you account for the shenanigans in the 2015/16 tax year with the 2 mini-tax years?

Gronson wrote: »

My understanding of the AVCs is that it can be drawn as a tax free lump sum on retirement provided it doesn’t comprise more than 25% of the total pension pot (which it won’t), so I wasn’t worried about paying tax later on during drawdown.

Okay, but my guess -- and personally I only have DC pensions, so take this for what it is worth -- is that this tax liability will manifest somewhere along the line. Without AVCs you could perhaps have an initial tax-free lump sum and then lower taxed regular payments in future. With the AVCs you might take the initial tax-free lump sum from those, but the result would be higher taxed regular payments from non-AVC stuff in future.

At your income levels you probably want to watch out for two other potential lurking dangers. The first is the pensions annual allowance taper which starts at £150k of annual income (all income, not just salary). It is particularly hard to know in advance whether or not you will hit this until it is too late to do anything about it, when you are then hit with a large and unwanted double-tax bill on pension contributions. (The cynic in me suspect that this is precisely the outcome George Osborne was aiming for with this ridiculous wheeze.)

The second is the risk of hitting the pensions lifetime allowance. If you have only DB pensions this is much less likely for you than for those of us with only DC pensions -- DB gets much better treatment than DC here. Still worth watching out for in future though, and one to avoid where you can.

Pension "simplification", eh?