Pension - Unused Income Tax Allowances

16confused · 17 May 2018 at 6:18PM

Hello,

I am not very knowledgeable regarding pension savings and have been paying only 3% of my monthly salary into my pension in previous years. I'm enrolled in a salary sacrifice scheme so that my pension contribution is paid directly from my salary each month. My employer also contributes 6%.

I have been given a large one-off bonus at work this years which likely won't be repeated.

I would prefer to put this extra money into my pension rather than paying it in tax. My understanding is that I can put 100% of my salary into my pension tax free until I reach the £40k annual limit? As this point I would need to start paying tax on whatever I put into my pension pot. I have sufficient resources such that I don't need a monthly salary and can do this for 12 months or more and so will change my contribution form 3% to 100% immediately.

I've done some research and what is unclear (to me anyway) is how I go about benefiting from the previous years unused allowances? I'm assuming that if I continue paying putting in 100% after this £40k limit for 2019/19 has been reached I won't then automatically begin using my previous 3 years allowance on later amounts that I put in? Presumably I have to go through a process to use this allowance? i.e. notifying the tax office and completing relevant documents?

I have also looked at other tax based investments to try and help me reduce my tax bill but putting it all into my pension tax-free seems like the least risky and most straightforward way to invest the money (a pension should be considered an investment right?) and use the tax allowances from previous years that I did not benefit from at the time.

Can anybody see any downsides in this or suggest possible better alternatives?

By way of background I'm 39 have a steady job, some savings and a relatively small mortgage with manageable monthly payments. I have no children to support and none on the horizon. My girlfriend and I don't need alot of money to live on which I why I've been able to save money in previous years when my salary was much lower. It will likely be lower again in the future too.

Thanks in advance.

zagfles · 17 May 2018 at 6:37PM

16confused wrote: »

Hello,

I am not very knowledgeable regarding pension savings and have been paying only 3% of my monthly salary into my pension in previous years. I'm enrolled in a salary sacrifice scheme so that my pension contribution is paid directly from my salary each month. My employer also contributes 6%.

I have been given a large one-off bonus at work this years which likely won't be repeated.

I would prefer to put this extra money into my pension rather than paying it in tax. My understanding is that I can put 100% of my salary into my pension tax free until I reach the £40k annual limit?

Sort of. See this thread https://forums.moneysavingexpert.com/showthread.php?t=5763726

As this point I would need to start paying tax on whatever I put into my pension pot.

As per above thread you need to consider the limits separately, they are different. If you exceed the annual allowance, with carry-forwards, you need to declare on your tax return. If you exceed the 100% of earnings you need to tell your pension provider not to claim tax relief.

I have sufficient resources such that I don't need a monthly salary and can do this for 12 months or more and so will change my contribution form 3% to 100% immediately.

You can't put in 100% by sal sac. This is employment legislation, not pensions. Reason is that the employer must pay you national minimum wage. Sal sac reduces your salary.

If your employer offers "net pay" you can do it that way instead (don't get NI relief), but why would you want to, since you won't get tax relief below the personal allowance.

You could sal sac down to NMW then use a personal pension for the rest - that way get tax relief on the amount within your personal allowance (yes - you get tax relief on money you didn't pay tax on! But only by using a RAS - relief at source - scheme like a personal pension).

I've done some research and what is unclear (to me anyway) is how I go about benefiting from the previous years unused allowances? I'm assuming that if I continue paying putting in 100% after this £40k limit for 2019/19 has been reached I won't then automatically begin using my previous 3 years allowance on later amounts that I put in? Presumably I have to go through a process to use this allowance? i.e. notifying the tax office and completing relevant documents?

You can only carry forwards the annual allowance (ie the £40k), not the 100% of earnings limit. You don't need to do anything to carry forwards, just keep records in case HMRC query it.

Note that the annual allowance includes employer contributions - so you need to add to what you put in. The 100% of earning limit doesn't.

16confused · 17 May 2018 at 6:50PM

Zagfles - thank you very much for your help!

I have a lot of reading to do but of reading to do but your responses will really help me get started!
Very pleased to hear that I will be able to get some pension benefit on the tax that I had paid previously.
The RAS point that you made also sounds interesting.
As I say I don't need much to live on and so if I can put funds directly into a pension tax free then I will do so.

16confused · 17 May 2018 at 7:20PM

"You can't put in 100% by sal sac. This is employment legislation, not pensions. Reason is that the employer must pay you national minimum wage. Sal sac reduces your salary"

I would therefore need to work out what the minimum salary would be based on my location and contractual hours? I could then have anything over this figure (as a percentage of my income) directed into my pension.
I think the calculation would be something like this:
£6.50 per hour (national minimum wage) * 7.5 (contractual daily working hours) * 21.74 (average number of working days in a month) = a minimum monthly salary of £1059.82
I would then need convert this into a percentage of what I was paid so that this became my monthly contribution?

zagfles · 17 May 2018 at 7:43PM

16confused wrote: »

"You can't put in 100% by sal sac. This is employment legislation, not pensions. Reason is that the employer must pay you national minimum wage. Sal sac reduces your salary"

I would therefore need to work out what the minimum salary would be based on my location and contractual hours? I could then have anything over this figure (as a percentage of my income) directed into my pension.
I think the calculation would be something like this:
£6.50 per hour (national minimum wage) * 7.5 (contractual daily working hours) * 21.74 (average number of working days in a month) = a minimum monthly salary of £1059.82
I would then need convert this into a percentage of what I was paid so that this became my monthly contribution?

NMW for over 25's is now £7.83 an hour, see https://www.gov.uk/national-minimum-wage-rates

16confused · 18 May 2018 at 9:09AM

Thanks you - good point

Is my logic still correct though that this calculation would take me down to the NMW level? Anything over and above this monthly figure, once converted into a pension, could be transferred into my pension pot?

Thanks

Brynsam · 18 May 2018 at 9:24AM

16confused wrote: »

Thanks you - good point

Is my logic still correct though that this calculation would take me down to the NMW level? Anything over and above this monthly figure, once converted into a pension, could be transferred into my pension pot?

Thanks

If you are keen to pay your full salary into your pension, nothing to stop you paying most of it by salary sacrifice (which is classed as an employer contribution) and then contributing the rest as an employee contribution.

Linton · 18 May 2018 at 10:05AM

Brynsam wrote: »

If you are keen to pay your full salary into your pension, nothing to stop you paying most of it by salary sacrifice (which is classed as an employer contribution) and then contributing the rest as an employee contribution.

You need to be careful with this one. If your pension contribution is made via your employer they may well take it from your gross income and then deduct tax, which in this case there wouldnt be any. However if you pay into a private pension you will get the full 20% tax relief added by HMRC although you would not have actually paid that much tax, your gross income being not far from your tax allowance.

Pension - Unused Income Tax Allowances

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