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Where Taxpayers and Advisers Meet

Exceeding Pension Annual Allowance

nwatson
Posts:9
Joined:Wed Aug 06, 2008 2:19 pm
Exceeding Pension Annual Allowance

Postby nwatson » Mon Mar 06, 2017 3:37 pm

I wanted to clarify whether paying excess of annual allowance effectively gives rise to two taxable events on the excess amount - both on the initial contribution and on the withdrawal.

For example, if I exceed my Annual Allowance by say £10k I have to pay tax on the excess at say 40% leaving £6k sitting in my SIPP.
When I finally drawdown the pension, assuming now a basic rate payer and no growth on the contribution, I could then withdraw 25% tax free = £1500 plus the remainder less 20% tax = £3600. So my net receipt is £5100 which is an equivalent tax rate of 49%.

Is this correct?

AmanSood
Posts:216
Joined:Mon Jan 09, 2017 4:12 pm

Re: Exceeding Pension Annual Allowance

Postby AmanSood » Wed Mar 08, 2017 10:37 am

If you exceed your annual allowance then you have to pay any additional tax due on the excess via your self assessment tax return. So in your example, the annual allowance has been exceeded by £10k. The amount in your pension is still £10k and not £6k. When you file your return you would have to pay tax say at 40% on the £10,000 i.e. £4,000 directly to HMRC. When you take out your pension, 25% of your pension pot (£10,000) £2,500 can be taken tax free and the balance will be taxable depending on the amounts paid and any other earnings in the year. So you would be double taxed on part of this income hence why it's important to ensure you don't exceed your annual allowance. If your annual allowance is exceeded as a result of for example an employer pension contribution, then it may be possible to discuss this with your employer and instead get a pension cash alternative instead of a pension contribution going forward.
Advising on UK employment, expatriate and personal taxes
aman.sood@e-taxconsulting.com.
+44 (0) 207 846 0155


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