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Where Taxpayers and Advisers Meet

Pension allowance carry forward

Jupiter01
Posts:70
Joined:Tue Jul 11, 2023 8:11 pm
Re: Pension allowance carry forward

Postby Jupiter01 » Wed Jun 19, 2024 9:02 am

I would be grateful for your guidance on this please. I am planning contributions and want to get my head around this. Thanks again.

someone
Posts:714
Joined:Mon Feb 13, 2017 10:09 am

Re: Pension allowance carry forward

Postby someone » Wed Jun 19, 2024 9:39 am

Are you doing this with the HMRC online software?

If so, set your pension contribution to zero, go do the "view your calculation" pages and look at the detailed calculation - it will break down how you are taxed at each band.

Repeat with the contribution set to 40K (say) and look again how it does the calculation.

Keep pushing it up until you have a tiny amount being taxed at 40% - that will tell you the threshold at which you'll only be getting 20% tax relief on any incremental contribution.

IIRC the number you enter on the HMRC site is the gross contribution - so you'll need to take 20% off of that if you're paying it into a SIPP. But if you're planning to do this via payroll contributions then you probably won't want to delete the 20% although it depends on the type of payroll contributions you make.

I haven't got time to write up a more detailed breakdown but you should find that (gross) contributions (based on a total taxable income of 140K) from 0-14K will get 40% relief, from 14-40K will get 60% relief and from 40K-90K will get 40% relief again. But your tax due will "only" go down by 20%/40%/20% of the incremental contribution as you pay the other 20% and then the pension fund reclaims it.

All else being equal, if you enter a gross pension contribution of 40000 and look at the tax due, and a pension contribution of 40001 and again look at the tax due, it should change by 20p if you're getting 40% relief, 40p if you're getting 60% relief, 25p if you're getting 45% relief, and 0p if you're getting 20% relief.

(Don't forget about the annual allowance - especially if you've made significant contributions in earlier years or didn't have a pension at all in the earlier years where you can't use carry forward, the HMRC calculation will assume that any contribution qualifies for relief and you have to calculate the tax charge separately if you go over the limits)

Jupiter01
Posts:70
Joined:Tue Jul 11, 2023 8:11 pm

Re: Pension allowance carry forward

Postby Jupiter01 » Wed Jun 19, 2024 11:30 am

Thanks for this and I wasn't aware of the breakdown page to see tax by the different thresholds. Yes, I am doing this online. I want to come back to this in a moment.

Previously, I entered my income details and the usual expenses and benefits, skipped forward to view calculation and can see that the balance is 0. This is what I would expect as my tax code correctly reflects all of this. I then try the following scenarios:

- If I pay £12k gross pension contributions, I am owed £3k. Approximately 25%
- If I pay £15k gross pension contributions, I am owed £3,750. Approximately 25%
- If I pay £30k gross pension contributions, I am owed £9,419. Approximately 31%
- If I pay £70k gross pension contributions, I am owed £19,888. Approximately 28%
- If I pay £100k gross pension contributions, I am owed £24,303. Approximately 24%

I wont go on. I am sure you get the idea.
The above had me thinking that gross contributions between 30k and 70k is where I get the maximum tax relief. I was then planning to punch in some numbers between these two and detect where the percentage starts to fall.

I appreciate that with all of the above I have already had the 25% auto top-up by the pension provider.

Now, returning to your response and the use of the tax breakdown page. I used the suggested approach and got this down to a situation where my personal allowance is restored, all of the remaining income is taxed at 20%, apart from £1 at 40%. This happens with a gross pension contribution of £92,070. However, when I enter this, the balance owed to me is £24,303 and that's approximately 26%.

My interpretation - wrongly perhaps - is that the most optimal contribution still sits between 30k and 70k but I don't entirely understand why! Logically, I expected the best return to be at £92,070 as all the income is now either tax free or taxed at the basic rate.

Can you please help me understand this. Thanks for your support.

someone
Posts:714
Joined:Mon Feb 13, 2017 10:09 am

Re: Pension allowance carry forward

Postby someone » Wed Jun 19, 2024 1:30 pm

Looking at that, it looks like you're earning more than 150K - so you're paying tax at 45% - that's the tax relief you will get on pension contributions that match the amount about that. (you get 25%, pension gets 20% of it so you see refund of 25%)

Then, between (approx)126K and 150K you're paying 40% tax - so your "average" tax relief will start to fall - if you had 24K at 45% and 24K at 40% then it's 48K at an average of 22.5%

Then, between 100K and (approx)126K you're paying 40% tax but also regaining your personal allowance. So the effective tax rate is 60% - so your average will start to climb again.

Finally between (approx) 50K and 100K you're back to 40% relief so your average will fall again.

(Hope that makes sense - I've dashed it off before a meeting)

someone
Posts:714
Joined:Mon Feb 13, 2017 10:09 am

Re: Pension allowance carry forward

Postby someone » Wed Jun 19, 2024 1:49 pm

To calculate your marginal "relief rate" at 12K, 15k, 30k, 70k, 100k do the calculation again at 12100, 15100 etc. The difference between the tax due will be the marginal rate at that level of contribution.

Jupiter01
Posts:70
Joined:Tue Jul 11, 2023 8:11 pm

Re: Pension allowance carry forward

Postby Jupiter01 » Wed Jun 19, 2024 2:13 pm

Yes, I think I oversimplified my initial response. My annual salary is £141k and hence approx. £17k falls into the higher rate by default.
Notwithstanding the above, I think my analysis is correct i.e. the optimal level of tax relief is when I contribute around 30k-70k. As you say, when we go above this, the average tax relief rate is dragged down. May be that's what I should look to pay in the current year and then do a similar level of contribution in the following year (after going through the same analysis)?

I can see that if I contribute £36k into my SIPP, auto-relief of £9k is added automatically. If I then check the effect of £45k gross contribution in my tax return. This fetches me a further £14,800 from HMRC. In summary, £36k of my money gives me a return of 66% when you take these two sets of reliefs into account.

If I do the same for a gross contribution of £92070 (removing all the taxable income at 45% and 40%), it returns me 57%.

Hope that makes sense and thanks again.

someone
Posts:714
Joined:Mon Feb 13, 2017 10:09 am

Re: Pension allowance carry forward

Postby someone » Wed Jun 19, 2024 3:15 pm

Ooooh, I've just looked it up - I left the UK at the start of the 23-24 tax year - I didn't realize the 45% band started at 125140 now!

Assuming an income of exactly 141K, this is what I'd expect as a tax refund on a gross 45K contribution:

15860*.25 = 3920 (the relief on the proportion of income - taxed at 45%)
25140*.4 = 10056 (income in the personal allowance taper - effective tax rate is 60%)
4000*.2 = 800 (income below the personal allowance taper - 40%)
=======
14776


One important consideration to bear in mind is whether tax relief on pensions gets restricted for the 25-26 tax year with the new government. You will get at least 40% relief on contributions up to 141000-50270 = 90730. So you must toss up whether to pay in 90K now or 45K this year and 45K next year. An extra 45K now will bank that 9K refund but will mean missing out on the extra 5776 next year.

It's even possible the will bring in anti-forestalling regulations prior to the new tax year - i.e. contributions made before (example) August 22nd 2024 will attract full relief, those after won't. c.f.:
https://www.pensionsage.com/pa/no-full-refunds-for-victims-of-anti-forestalling.php where people who didn't know the rules had changed got caught out back in 2009-2011.

Jupiter01
Posts:70
Joined:Tue Jul 11, 2023 8:11 pm

Re: Pension allowance carry forward

Postby Jupiter01 » Wed Jun 19, 2024 3:40 pm

Thanks for coming back to me. I think I am on the same page as you.
You've calculated that a gross contribution of 45k gets you £14,776 and in my last post, I also worked this out to be £14,800. I do also take your point on changes that may be coming in with a new government.

I am still unclear on the following:
- Other than repeatedly punching numbers into the tax return and then viewing calculations, how can I ascertain the optimal pension contribution that gets me the highest return. At the moment it seems to be around 45k gross. This gets me 33% (on top of the auto relief).
- Other than this being the point at which I have maxed out the tax relief I can get, what is the significance of working out when all your income is shifted into the PA and basic tax rate? i.e. nothing is taxed at higher or additional rate. In my case this is around 90k but as we have worked out, this isn't the optimal contribution level. i.e. It would be better to spread this over two years.

I am mindful that I will be asking myself this same question next year (and the year after that...) and each year my salary figures will change. How can I calculate the optimal pension contribution level?

Apologies if you have already answered this I am not grasping it.

someone
Posts:714
Joined:Mon Feb 13, 2017 10:09 am

Re: Pension allowance carry forward

Postby someone » Wed Jun 19, 2024 4:53 pm

In brief:

Assuming you don't want to get large sums into your pension as quickly as possible, then the optimum tax relief at your income occurs when you pay in exactly the amount that your income is over 100K. Only if/when your income goes over 160K do you need to start worrying about carry-forwards because you'll need to pay in more than the annual allowance.

If you want to get as much as possible into your pension as quickly as possible then you need to think about carry-forward that will expire, and you want to be aiming for contributions that are (approximately) all of your income over 50K or 60K+any carry forward available.

---

My calculation was more complicated because the band from 125K to 150K "only" got 40% relief and there was the pension taper starting at 150K so those all had to be factored in. This is somewhat subjective but this is the sort of calculation I used to do.

A. Do you have any unused carry forward relief from 3 years ago (the amount that will "drop off" if you don't use it this year.
If Yes then calculate the minimum of 60k+plus the unused relief or your income that is above the basic rate band.
This tells you if you can use up that allowance that is about to fall off (IMO there's no point paying into a pension and only getting 20% relief, YMMV)
If you don't use it now it's gone - but that doesn't matter unless you expect to make an average of 60K per year contributions every year (or your income pushes you into the pension taper regime in the future)

B. Do you have enough carry forward relief to get the 60% relief from the personal allowance taper. This is trivial for you at the moment but if, for example, your income was 200K then you'd need to contribute 100K to your pension to get the maximum available 60% relief which would require 40K of carry forwards from earlier years. You get 60K per year of pension contributions but only need to contribute 41K to get all the 60% relief available based on your current income.

C. Do you expect your income in future years to take your income above 160K? If yes, then carry-forward amounts might be more valuable in later years than they are now so smaller contributions now might allow more relief in later years. But you can only use carry-forward from the last three years and you can only "save" the year about to fall off if you use up all of the current year allowance.

There isn't a solution to this question of optimal amount of pension contribution because it depends on future income and what your goal is.

At one period in my career I made minimum (work only) contributions for a couple of years and then made a maximum contribution using up all of the carry forwards from the previous two years. This allowed me to get 60% relief on some of it in one year which wasn't accessible if I made 40K of contributions every year because my income was too high.


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