Pension allowance carry forward

[D&C]

IIUC = if I understand correctly
HICBTC = an unusual abbreviation for High Income Child Benefit Charge (more commonly known as HICBC)

The effective tax rate of 60% arises where you lose some (of all) of your Personal Allowance be used your adjusted net income (ANI) is £100,002 or more. Say your ANI is £110,000 then your Personal Allowance will be reduced by £5,000 (a £1 reduction for each £2 your ANI exceeds £100,000). Once your ANI hits £125,140 (or more) your Personal Allowance will be £0.

A knock on effect of this is that more income will then be taxed at 40%.

The 60% is a combination of the loss of Personal Allowance and additional 40% tax due.

The higher rate relief due to you is wholly dependent on your overall tax position, it definitely won't always be restricted to 20% (or less if you don't pay enough higher rate tax).

In the example above contributing an extra £5,000 (gross) would reduce your ANI from £110,000 to £105,000 meaning you retained an additional £2,500 of your Personal Allowance. And as a result less 40% tax would also be due.

[D&C]

The effective tax rate of 60% arises where you lose some (of all) of your Personal Allowance be used your

That should say

The effective tax rate of 60% arises where you lose some (or all) of your Personal Allowance because your.....

[Jupiter01]

I understand that if the income increases to £125,140, one loses their entire personal allowance. But what happens to the income that was previously tax free? Is it taxed at 20% and does the 40% still kick-in at £37,700?

I am still unclear on the 60% and how that relates to the tax relief. Sorry, this is not my area of expertise and trying to follow your explanations as best as I can. Much appreciated.

I can see - based on earlier responses - that if one were earning £125k, they now have a larger portion of income taxed at 40% and hence they could make larger pension contributions (including the carry forward) and still get the extra 20% via the tax return. Whereas, under the 100k scenario it made sense to delay the contributions and spread across multiple years. I’m not grasping the implications of the aforementioned 60%.

[D&C]

Is it taxed at 20% and does the 40% still kick-in at £37,700?

No and yes. It's taxed at 40% as the 20% band has already been used. Or if it makes it simpler to understand you could say yes it is taxed at 20% but that then means the income that was originally using the 20% band is then pushed into the 40% band. Either way it ends up as 40%.

I'm not sure you have fully understood how RAS pension tax relief works.

Firstly you get 25% added to your contribution by the pension company (20% of the gross contribution).

the gross contribution also increases your basic rate band. So more income can be taxed at 20% meaning less is taxed at 40% (if you have enough income).

And the gross contribution also reduces your adjusted net income. As your Personal Allowance is determined by adjusted net income this means you can retain some (of all) Personal Allowance when it would otherwise be lost.

What RAS contributions don't do is entitle you to an extra 20% relief. Your income tax liability is recalculated taking into account the factors mentioned above so depending on your overall tax position the additional tax relief due (over and above that added to your pension fund) might be nothing. Or as much as 60%. In some unusual situations involving HICBC it can mean the tax relief far exceeds 60%.

[someone]

Thanks. If you get the chance, I would welcome your validation of my numbers and calcs. I have some confusion on where the gross and net contribution amounts apply.

On your latest response:
- what is IIUC HICBTC?

If I Understand Correctly, High Income Child Benefit Tax Charge (although I've just googled it and I see it's HICBC - sorry. In my defence: https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/reduce-high-income-child-benefit-charge)

- I am on PAYE and don't follow this part : " Another thing to think about if you're expecting your income to rise, the band from 100K to 2x personal allowance gets 60% relief. So if you expect your income to be over 100K next year then it's (almost always) better to keep enough money back to make contributions with 60% relief the next year." An example on this would be very helpful please.
- on this "So assume you want to pay 25K (gross) into your pension because your income is 125K - you'll pay in 20K (which you'll need to take out of your bank account, i.e. you'll need the money up front), the pension fund will reclaim 5K from HMRC (so the gross contribution is 25K) and you'll then get another 10K back from HMRC "eventually".", wouldn't I get 5k (you stated 10k) from HMRC when doing my tax return?

Thanks again.

Basically, if you're on PAYE the the money you receive will already have had 20, 40, 60, or 45% tax deducted (depending on exactly how much you earn and which tax bracket it falls into).

But if you pay into a SIPP you will have to do it from money paid to you, so even though (eventually) you'll get some of the tax refunded, in the short(ish) term you'll be paying money into your pension that HMRC owes you back but won't have paid you back yet.

Ideal route if you're PAYE is to get your employer to make the contributions, that way you can avoid this problem - but it's not always possible, especially if you need to wait until end of March to know exactly what your income will be in order to make the correct payment to get your income to where you need it to be.

If you're on a very regular salary, no variable bonus at end of year, no monthly overtime or variable pay, then you can predict your income out to the end of the tax year. But if your bonus is announced and paid end of January (which is very common), then there typically isn't time to get your tax code changed prior to end of the year, so (as an example) if your basic pay was exactly 100K and your (unexpected/unanticipated) bonus at end Jan was 25K and you want to put all of your bonus into your pension to avoid the 60% tax hit, you'll only receive 10K extra in the bank due to the bonus but need to make a SIPP contribution of 20K in order to put it all into your pension. So until you get the tax refund you'll need to fund 10K from other income/savings.

[Feds]

Is the essence of this, that the additional 20% (via tax return) will only be paid for the income that has been originally taxed at 40%? This would make sense I suppose... This would be £49730 in the case of someone earning £100k. Secondly is this figure of £49730 my money or my money + automatic tax relief?

"£49,730 is the gross figure, so if you invest £39,784, it would gross to £49,730 and therefore take all earnings out of higher rate"

Secondly, if I paid £55000 of my own money into the pension, the auto relief will be received and this will be the case for any amount which is within my annual allowance plus carry forward limit?

The auto relief is always given. But if you exceed your allowances, you will have to pay some or all back as a tax charge via self assessment.

Finally, to take another example to make sure I have understood this, If I paid £55000 of my own money into the pension, this becomes £68750 once the auto relief is applied. But when I claim tax relief via my tax return, I enter the figure of £55000 (my money that went into the pension) and it does all the maths and essentially calculates that I will receive additional relief of £12432.50 (On the £49730 portion and no additional relief on the remaining £5270).

No you always enter in the gross figure, i.e. £68,750. Your basic rate band threshold (BRT) is then extended by the gross figure which gives you the additional relief on the relevant amount. A £68,750 gross contribution gives you 20% relief at source (£13,750). Through the BRT extension, it provides an additional £9,946 relief – this is because your income over and above the pa and normal BRT (i.e. £49,730) will no longer be taxed at 40%, but 20%.

If this is correct, I could have contributed the £5270 in the following year and got 40% on that too. I would be most grateful if you could validate this for me. Thanks for your support.

You’d only get the full 40% tax relief on the whole contribution up to £49,730. So, if you wanted to pay in £68,750, you could consider investing £49,730 in 23/24 and then £19,020 in 24/25.

[Jupiter01]

Thanks @feds.
A couple of follow-up's please:
- on a £100k salary, I can pay a maximum of £39,784 of my money to get the full 40% tax relief. Anything beyond this will only attract the 20% auto relief. Correct?
- secondly, when I enter my gross figure into the SA, does it do all the necessary calculations for me? i.e. how much gets the 40% versus 20%?

Thanks again.

[Feds]

Yes, the excess contribution over £39,784 (net) would attract 20% only
And yes, enter in the gross figure onto the SA and it will do the rest.

[Jupiter01]

A thought on this as I am completing my Tax Return for YE 23. I can test the overpayment scenarios in the tax return - obviously before submitting! I can see what happens to the credit amount if I pay 50k into my pension versus 65k, as an example. This is the only calculation that ultimately matters I suppose? This will also include my income, benefit in kind figures, etc. and hence provide a accurate indication as to what I could put into the pension next year and the effect it would have. I appreciate that these figure may change slightly for YE 24. Please let me know if I am missing anything.

[Jupiter01]

Can I revisit this with a new example please. I want to gauge when it makes sense to spread pension contributions over multiple years rather than a lump sum in a single year.
If the annual salary is £140k, can I pay £89730 (the salary above £50270) gross into my pension and get the full 40%? After this, I think the tax relief starts to taper away and hence, make sense to pay in the following year?

Having said that, I am not sure I understand this correctly as some of the above income (after £125140 is in the additional rate) and also, I know that these figures start to reduce my tax free entitlement. I'd really appreciate your breakdown of this. Thanks again.