Low earner pension contribution

steve13579 · 15 July 2018 at 11:11AM

First some facts - I hope I have included al the relevant info needed:
I am a part time worker and a low earner.
This year I became self employed.
I opened a SIPP on 19/02/2018 and transferred in my previous workplace pension - held since 01/08/2015 - balance £2200
I would like to contribute a lump sum to my SIPP.
This current financial year 2018-19 (first year self employed) I do not expect to earn very much more than £10,000.
Previous years income:
2017-18 £10500 (before tax)
2016-17 £14000 "
2015-16 £14000 "
My question is - how much is the maximum I can pay in to my new SIPP this financial year?
Majority of illustrations I find online use an example of £40000+ income or a non tax paying spouse. No definitive answer for a low earner, not paying income tax but paying national insurance.
I understand £2880 is the maximum anyone earning under the £11500 can contribute?
But that any unused allowance from previous 3 years can be used also?
I don't want to make a mistake but don't want to miss out on any tax break either.
Thank you

greenglide · 15 July 2018 at 11:24AM

You are limited by your total earnings in the 2018/19 tax year. Carry forward is only appropriate when your earnings are over the £40000 limit which yours aren't.

You will only know you total earnings towards the end of the tax year.

You interpretaion of the £2880 limit isn't quite right.

Someone who earns less the £3,600 can pay £3,600 (Including tax relief). If you earn more than the you can pay your full earnings (net of tax relief). It makes no difference whether you actually pay tax or not.

Spreadsheetman · 15 July 2018 at 11:25AM

You can contribute up to your salary or £40,000, whichever is lower. Your limit would be £10,000 if that is your salary.

Note that £10,000 is after the 20% tax rebate (which most SIPP providers automatically recover for you), so your actual payment is £8,000.

If your salary is higher than £40,000 and you have made pension contributions under £40,000 in any of the 3 previous years than you can use carry-forward of unused allowances to make more than a £40,000 contribution (still limited by your salary).

There are more rules with CF (you have to have a "qualifying scheme"), but it appears that your current year's income won't be high enough to use CF anyway.

dunstonh · 15 July 2018 at 11:45AM

Majority of illustrations I find online use an example of £40000+ income or a non tax paying spouse.

£40,000 is often used in examples as effectively, up to £40,000 is easy. After £40,000 things differ. So, examples will often focus on the over £40k earners.

I understand £2880 is the maximum anyone earning under the £11500 can contribute?

There is no £2880 maximum. You are making two errors here.
1 - you can pay 100% of your earnings in. So, you can pay £11500 into a pension.
2 - A £2280 maximum does not exist anywhere. It is a £3600 maximum and only applies to non-earners or those that earn under £3600 a year.

ut that any unused allowance from previous 3 years can be used also?

Only if you are contributing at least £40,000 into a pension in this tax year (and you cant)

kidmugsy · 15 July 2018 at 12:05PM

For you your maximum gross contribution equals your earnings for the year. That's "earnings" not "income": interest, rent received, dividends, and so on don't count (with an exception for holiday lets).

The amount you hand over to your pension provider is called the net contribution and is 80% of the gross contribution. So for you the maximum net contribution will be about £8k. The provider claims the further £2k from HMRC.

Note that £2k is 20% of the total £10k, corresponding to 20% tax relief. It happens even though you won't be paying any income tax. Presumably governments have wanted to incentivise pension contributions for low earners.

The tax relief typically takes a couple of months to appear in your account.

steve13579 · 15 July 2018 at 1:47PM

Thank you so much.
Much clearer.
Just one more question - if I paid in £8000 (from a cash ISA) to my SIPP within this financial year. But unfortunately had only earned £6000 by April 2019 - what are the consequences?

LHW99 · 15 July 2018 at 2:02PM

You don't get tax relief on the excess, and would get a pensalty
https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/the-annual-allowance

If you are in doubt about your annual earnings, better to make small contributions early in the tax year, and top up just before the end once you know what your earnings are going to be.

dunstonh · 15 July 2018 at 2:16PM

Many self employed people pay a lump sum in near the end of the year once their earnings are known. Some do no regular contribution at all and do ad-hoc only. Some do a small regular that they know is affordable and then ad-hoc near the end.

jamesd · 15 July 2018 at 2:53PM

steve13579 wrote: »

if I paid in £8000 (from a cash ISA) to my SIPP within this financial year. But unfortunately had only earned £6000 by April 2019 - what are the consequences?

You tell the pension firm your actual earnings and they pay back the excess to you as a refund of excess contributions lump sum.

There is no penalty for doing this. All that happens is a completely drama free partial refund.

If you were to exceed the 40k annual allowance or had triggered the 4k MPAA and had enough earnings there's also no penalty. You just pay a tax charge instead. Sometimes this can be worth doing, as it is for this person (MPAA, would lose employer contributions) and this one (AA, 100k+ income loss of personal allowance).

So no big deal, just try to get it right if you can.

Low earner pension contribution

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