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  • FIRST POST
    • Gronson
    • By Gronson 9th Jul 18, 11:17 PM
    • 13Posts
    • 3Thanks
    Gronson
    Pension Input Amount and 60% marginal tax rate
    • #1
    • 9th Jul 18, 11:17 PM
    Pension Input Amount and 60% marginal tax rate 9th Jul 18 at 11:17 PM
    Hello all
    I would be grateful for any help on this one.

    I am in a DB pension scheme which has the option to make additional voluntary contributions as well.

    For the current year, the pension input amount for my DB scheme will be £39,000 to be tested against the annual allowance of £40,000. I have no unused annual allowance brought forward from the 3 previous years.
    My pay after salary sacrifice (cycle to work and pension contributions) will be £105k

    Does it make sense to make AVC contributions of £5k or £6k which will benefit from a marginal tax rate saving of 60% (40% tax and 20% due to loss of personal allowance) even if I have to pay tax on excess pension input allowance at 40% on £4K or £5k? May also have the benefit of taking me out of self assessment...

    Am I missing something?
    Last edited by Gronson; 10-07-2018 at 8:30 AM. Reason: More information added
Page 1
    • Brynsam
    • By Brynsam 10th Jul 18, 12:39 AM
    • 1,568 Posts
    • 1,137 Thanks
    Brynsam
    • #2
    • 10th Jul 18, 12:39 AM
    • #2
    • 10th Jul 18, 12:39 AM
    Sounds ideal territory for proper financial advice - the sort you pay for. There may be other avenues (not just AVCs) which could net a tasty saving.
  • jamesd
    • #3
    • 10th Jul 18, 1:13 AM
    • #3
    • 10th Jul 18, 1:13 AM
    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.
    Last edited by jamesd; 12-07-2018 at 1:19 PM. Reason: Add correction
    • Gronson
    • By Gronson 10th Jul 18, 8:29 AM
    • 13 Posts
    • 3 Thanks
    Gronson
    • #4
    • 10th Jul 18, 8:29 AM
    Unused annual allowance
    • #4
    • 10th Jul 18, 8:29 AM
    Thanks Jamesd

    I should have made it clear that Iíve no unused annual allowance brought forward
    Regards
    • EdSwippet
    • By EdSwippet 10th Jul 18, 8:55 AM
    • 777 Posts
    • 736 Thanks
    EdSwippet
    • #5
    • 10th Jul 18, 8:55 AM
    • #5
    • 10th Jul 18, 8:55 AM
    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.
    • zagfles
    • By zagfles 10th Jul 18, 9:02 AM
    • 13,320 Posts
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    zagfles
    • #6
    • 10th Jul 18, 9:02 AM
    • #6
    • 10th Jul 18, 9:02 AM
    As it says here https://www.gov.uk/tax-on-your-private-pension/annual-allowance "Rates
    The amount you went above the annual allowance is added to your taxable income."

    So what good would it do? If you made AVC conts to take your taxable income down to £100k, but then exceeded the AA and as a result the excess was added to your taxable income, you taxable income is back over £100k and your personal allowance would still be reduced!

    Besides, how do you know what the PIA is for your DB scheme? How have you worked it out? Do you know for certain what your pensionable salary will be over the year?
    • Gronson
    • By Gronson 10th Jul 18, 9:08 AM
    • 13 Posts
    • 3 Thanks
    Gronson
    • #7
    • 10th Jul 18, 9:08 AM
    • #7
    • 10th Jul 18, 9:08 AM
    Thanks Edswippet
    My understanding of the AVCs is that it can be drawn as a tax free lump sum on retirement provided it doesnít comprise more than 25% of the total pension pot (which it wonít), so I wasnít worried about paying tax later on during drawdown.

    However, the other part of your answer is the nub of the problem.

    From the HMRC website I am still not sure whether if my taxable income less salary sacrifice drops below £100k, I retain all personal allowance and whether an excess pension charge above the £40k annual allowance gets treated as taxable income for the calculation of this personal allowance taper. I was hoping that I just got taxed on the excess pension charge at my highest marginal rate (40%) and it was not taken account of in the calculation of the personal allowance taper.
    • Gronson
    • By Gronson 10th Jul 18, 9:11 AM
    • 13 Posts
    • 3 Thanks
    Gronson
    • #8
    • 10th Jul 18, 9:11 AM
    • #8
    • 10th Jul 18, 9:11 AM
    Thanks Zagfles
    Iíve got a calculator which works out fairly accurately the pension growth arising from my DB scheme each year and I do know my pensionable pay for this year.

    It seems like I canít win on this one though

    Thanks for your help
    • zagfles
    • By zagfles 10th Jul 18, 9:18 AM
    • 13,320 Posts
    • 11,299 Thanks
    zagfles
    • #9
    • 10th Jul 18, 9:18 AM
    • #9
    • 10th Jul 18, 9:18 AM
    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
    • By Gronson 10th Jul 18, 9:46 AM
    • 13 Posts
    • 3 Thanks
    Gronson
    2015/16
    Yes, although my calculator broke down that year, the pension scheme provided my PIA for 2015/16
    • EdSwippet
    • By EdSwippet 10th Jul 18, 1:12 PM
    • 777 Posts
    • 736 Thanks
    EdSwippet
    My understanding of the AVCs is that it can be drawn as a tax free lump sum on retirement provided it doesnít comprise more than 25% of the total pension pot (which it wonít), so I wasnít worried about paying tax later on during drawdown.
    Originally posted by Gronson
    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?
  • jamesd
    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.
    Originally posted by EdSwippet
    Some pension schemes simply allow the AVC pot to be used to fund the 25% tax free lump sum on the combined value of the DB and DC portions. If there's enough DC to fund it all there's no reduction in the income from the DB portion.

    LGPS is perhaps the biggest scheme with this capability and it comes up quite often here. Putting in the AVC money, getting the tax relief and NI saving then getting it out tax free, is a very useful and often important factor when responding to LGPS-related questions.
    • Gronson
    • By Gronson 10th Jul 18, 3:25 PM
    • 13 Posts
    • 3 Thanks
    Gronson
    Lgps
    Thanks for the reply
    Yes, it is an LGPS scheme, hence the ability to take the AVCs tax free upon retirement

    Iíd like to maximise the value of this AVC pot subject to :
    Not going over annual allowance
    Trying to minimise the loss of personal allowance / maximise pension contributions which benefit from the 60% tax relief
    Keeping an eye on lifetime allowance

    Itís quite a balancing act!
    • zagfles
    • By zagfles 10th Jul 18, 4:31 PM
    • 13,320 Posts
    • 11,299 Thanks
    zagfles
    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.
    Originally posted by EdSwippet
    Yes, but the commutation rate on some/most DB pensions is so dire that it's usually not worth commuting pension for a TFLS even with the tax savings. So if they allow AVCs to be combined with DB and 25% of the combined pot taken as TFLS, they are effectively tax free on the way out without any loss elsewhere.
    • kidmugsy
    • By kidmugsy 10th Jul 18, 4:42 PM
    • 11,580 Posts
    • 8,103 Thanks
    kidmugsy
    When you break the AA there is an option called "scheme pays". Does that apply only to DC schemes ?
    Free the dunston one next time too.
    • Gronson
    • By Gronson 10th Jul 18, 4:56 PM
    • 13 Posts
    • 3 Thanks
    Gronson
    Thanks what I am banking on !!!
    • Gronson
    • By Gronson 10th Jul 18, 4:58 PM
    • 13 Posts
    • 3 Thanks
    Gronson
    One of the options open to me is to use scheme pays if the tax charge on excess pension growth is higher than £2,000
    • Gronson
    • By Gronson 11th Jul 18, 11:14 PM
    • 13 Posts
    • 3 Thanks
    Gronson
    Thanks to everyone who tried to assist with this. In the end I downloaded some self assessment software which confirmed that the excess pension charge DOES NOT count as taxable income for the purposes of triggering the personal allowance taper. So it does appear that you can make pension contributions which receive tax relief at 60% due to income level between £100-123k and which end up being taxed as excess over the £40k annual allowance at either 40% or 45%
    • kidmugsy
    • By kidmugsy 11th Jul 18, 11:22 PM
    • 11,580 Posts
    • 8,103 Thanks
    kidmugsy
    One of the options open to me is to use scheme pays if the tax charge on excess pension growth is higher than £2,000
    Originally posted by Gronson
    "Growth"? Is that a reference to LTA?
    Free the dunston one next time too.
    • Gronson
    • By Gronson 11th Jul 18, 11:33 PM
    • 13 Posts
    • 3 Thanks
    Gronson
    Scheme pays
    Hi
    No, ďscheme paysĒ is only usable when the annual allowance is exceeded and creates a tax charge of more than £2,000
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