calculating max allowable yearly pension contribution

[simoncree]

Hello,

I have a question please:

My salary this year is £60K and I will pay £2520 into a NEST pension with £360 tax relief total £2880

How much can I then contribute to my SIPP to bring me up to the 40K allowance?

I think it is 40,000 - 2880 = 37120. Then x 0.8 = 29696
So the tax relief on 29696 = 7424
total paid is 37120
add the 2880 from NEST = 40,000

Is this correct?

I can use carry forward for the previous 3 years so what is the maximum I can further contribute to get 100 percent of gross?

If I just claim 20 percent is it 60,000 - 2880 = 57120 x 0.8 = 45696?

Its very confusing I would really appreciate some advice!

Many thanks for any help given

[robbob]

calcs should be with regard to taxable pay per p60. gross pay per payslips may be different from taxable pay.

My salary this year is £60K and I will pay £2520 into a NEST pension with £360 tax relief total £2880

Tax relief is 25% of net cash contribution made so if you have added 2520 cash (or via deduction from your "net pay") tax relief would be 630 and gross amount contributed would be 3150.
If we do the double check calc 20% tax relief based in 3150 gross contribution = 3150*.2 = 630 and 3150-630 = 2520.

Note you mention 2880 here is is often the cash amoun people add being the amount when grossed up that adds up to the billy basic 3600 per year.


Note your calcs further down the page are correct if you add 29696 cash to sipp tax relief added into put (presuming you are eligible) will be 25% of that sum = 7424 = 37120 gross contribution.

Ensure you dont exceed 100% of taxable pay for the year and you should check with pension provider / ifa / the pension advisory service that contributions dont exceed maximum that pension rules allow based on your cicumstances.

If I just claim 20 percent is it 60,000 - 2880 = 57120 x 0.8 = 45696?

Presuming you can add full 60k of earnings you deduct 37120 gross and also grossed up smaller amount - say 3150 = 19730 gross you can add to get to 60k - the cash sum you add into your sipp is 80% of this total = 15784

[simoncree]

Thank you Robbob that's very informative

I contribute 1440 from my basic salary and 1080 employer contribution, a total of 2520, and 360 tax relief on my contribution , total is 2880

(I get a total 60 with field bonus etc)

[robbob]

I need to double check something here but will get back to you soon

[simoncree]

Thank you

[robbob]

Thank you Robbob that's very informative
I contribute 1440 from my basic salary and 1080 employer contribution, a total of 2520, and 360 tax relief on my contribution , total is 2880
(I get a total 60 with field bonus etc)

Ok that makes sense now - generally with employer contributions or contributions made as deduction from your gross pay rather than from your net pay i would recommend excluding these amounts from you initial calculations as there is no added tax relief available for you.

Note your payments deducted from salary will be deductions from your net pay (relief at source) as you have confirmed you get the 20% tax relief added in - note somewhat confusingly payments deducted from gross pay are what is called a "net pay scheme" .
If you have any doubts double check the tax relief is added in and that payments are "relief at source type"

I cant see anything wrong with your 40k allowance calculations - however note the 40k threshold i think is irrelevant for calculations to what you can add to pension this year - if you have more than sufficient brought forward allowances to ensure the 60k "taxable income limit" will be hit before you use up prior years allowances. I think you have already sussed tis fact though.


Ref the maximum you can put in i think it may be

60k taxable pay
less 1800 via employment you contribution only (ie employers ignored) with added tax relief
so potentially £58,200 gross 11640 tax relief added into pot so net amount you can add £46,560

I am not 100% certain but i think the employers contribution can be ignored here as you are not specifically claiming tax relief on these payments - however i am not 100% certain without doing further research - so i would say unless you get confirmation elsewhere it is probably more sensible use your original calcs if you have any doubts !

ie If I just claim 20 percent is it 60,000 - 2880 = 57120 x 0.8 = 45696?

[simoncree]

Thank you Robrob

I really appreciate you taking the time to look at this

I was also wondering about how to deal with the employers contribution and its useful information for future years considerations

Thanks again

[ben_power]

All contributions count towards your annual allowance.

For example, even a defined benefit pension might utilise part of your AA (annual allowance) as it is revalued each year.

Utilising salary sacrifice to make pension payments essentially avoids the need to claim tax relief as the tax was never paid (simpler) it also means that you will avoid paying national insurance thus saving approximately 12% as a basic rate tax payer and 2% as a higher/additional rate. These contributions absolutely count towards your annual allowance though.

Your AA is £40,000 providing you have relevant earnings of £40,000 or above. In your case, if your income is £60,000 you will be able to utilise £40,000 from this tax year plus and additional £20,000 of unused AA looking back from the previous 3 tax years, essentially utilising the oldest year's unused AA first. This in know as 'carry-forward'.

[someone]

One thing to consider is whether you expect to continue to earn at a similar level in subsequent years.

Because if you pay in 40K this year you will only get 40% tax relief on about 10K of it, the rest you will get only 20% relief.

Assuming you aren't planning to pay in 40K every year then paying 20K this year and 20K next (tax) year will cost you about 2K less than doing it all this year - but that requires you to be a higher rate taxpayer next year too.


And if there'a any chance of a bumper bonus year in the near future you might even want to delay payments. For example, if you were to get a 200K bonus in 2022-23 tax year then you could potentially pay in 160K of it.

Paying in enough to get tax relief on everything that is taxed at 40% makes sense - but I'd consider putting 20K of the rest into an isa rather than a pension as you will (probably) be taxed when you take it out of your pension whereas there's no more tax to pay once its in an isa and you can access it if you need to.

[ben_power]

@someone

I can see where your thought process is regarding the future earnings and whether you should consider delaying a payment to a future tax year in reality this would probably only work if you had existing cash deposits you intend to use and not future earnings. It also adds the risk that legislation 'could' change, unlikely maybe but certainly possible. There have been discussions around higher rate tax relief being removed for a while now so 'if' that happened you'd just lost a whole year or carry-forward.

Carry-forward is a rolling 3 year period so if you essentially fill up from the oldest year, if you delay making a payment now because you might earn more next year you're essentially giving up the carry-forward 'unused annual allowance' from 3 years ago.

As for paying into an ISA instead, it is unlikely that an ISA would be better. It would depend entirely on how much was withdrawn as income. Assuming the lifetime allowance is not exceeded then you would benefit from either 20% or 40% tax relief on the way in which an ISA would not receive. For fairness, if we assume both the ISA and pension achieves the same growth rate and we reach the point of needing to withdraw fund the ISA would normally lose here too. The pension would allow 25% to be withdrawn as tax free cash and the rest as taxable income, where the ISA as you correctly state would be 100% tax free.

Providing you withdraw funds sensibly over time through drawdown and remain a basic rate tax payer you would win every time. For example:

Lets keep the number simple and assume you only receive basic rate tax relief on the way in and your sensible and only pay basic rate on the way out:

I earn £1,000, I pay 20% tax (ignoring NI) I'm left with £800. I put my £800 into my pension and you put your £800 into an ISA. Due to tax relief I have £1,000 in my pot, you have £800. Let say neither of us achieve growth but just cover the costs of running the respective pots and we fast forward to needing to withdraw the funds.

I still have £1,000, you still have £800. Assuming we're both basic rate taxpayers you withdraw £800 tax free. I withdraw £1,000, 25% tax free (£250) and then I pay 20% tax on the other £750 (£150) I have a net payment of £850 to your £800 or £50 more.