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Where Taxpayers and Advisers Meet

Calculating Max Allowable Pension Contribution (Tax Relief)

jakinvegas
Posts:1
Joined:Thu Mar 11, 2021 11:49 am
Calculating Max Allowable Pension Contribution (Tax Relief)

Postby jakinvegas » Thu Mar 11, 2021 12:14 pm

Hello Folks,

I hope I can get some help from the experts here to understand the max allowable pension contributions allowed this tax year. Thanks for reading.

My annual salary is 110k. But this tax year, I will only be receiving payslips for Jan, Feb, March so tax year gross will be: 27 500.01
I've spoken to HMRC who have confirmed this puts me in the 20% tax braket, not the 40% one this tax year.
I intend to compliment my workplace pension by contributing into a SIPP.

I understand that my max pension contribution will be 27500.1 which will be used instead of the 40k max allowance.
My company pays 758.63 each month into a workplace group pension via salary sacrifice. This is the total employer and employee contribution.
(I think this number is inclusive of any tax relief, or an untaxed payment).
So the total contribution this tax year into pensions from all sources will be 2275.89.

I think that leaves my remaining monthly allowance to be 27500.1 - 2275.89 = 25224.12.

Tax Relief should top up by 25% to reach 27500.1, so I understand I can contribute 20179.29 this tax year and benefit from the tax relief.

Does that look about right to you?

I'm curious about the rule where you can use a previous years tax relief allowance in a current year.
Since I'll be in the 40% tax bracket next year, would it be better for me hold back my contributions until the next tax year?
For next year would that effectively mean I could add this years unused allowance in next years contribution, and benefit from 40% tax relief from a max of 40k for 2021/2022 and 40% on 25224.12 for 2020/2021.

Thank you,

Jak

robbob
Posts:3147
Joined:Wed Aug 06, 2008 4:01 pm

Re: Calculating Max Allowable Pension Contribution (Tax Relief)

Postby robbob » Thu Mar 11, 2021 3:25 pm

You really want to take advise from an IFA before you do anything pension wise - on the tax forum we only really advise ref the tax and there is much more to think about when it comes to adding tp pension than just the tax !!

Having said that if your taxable pay at tax year end is £25,224.12 and you have no other adjustments to taxable income then your calcs look spot on ref 20,179
I'm curious about the rule where you can use a previous years tax relief allowance in a current year.
Since I'll be in the 40% tax bracket next year, would it be better for me hold back my contributions until the next tax year?
For next year would that effectively mean I could add this years unused allowance in next years contribution, and benefit from 40% tax relief from a max of 40k for 2021/2022 and 40% on 25224.12 for 2020/2021.

The logic of your calcs here seem equally spot on - much better to get 40% tax relief on the contributions you make rather than 20% - so everything else being equal delaying payment seems close to being a no brainer - there is though the knock on implications of then having less unused allowance for the following year (year two) which could limit somewhat your payments at a later date if that years excess was used at a later date - ie if 3 years after the second year you wnated to take advantage of that years unused allowances they would be less and year 1 would have fallen out of the 3 year window - i am not an expert on the 3 year widow so dates might be slightly wonky but hopefully you get the principle involved.

Note if taxable income is over 100k you would normally lose personal allowance so practicably speaking tax relief on payments for income in the 100k-125k(approx) bracket is actually 60%!!

ben_power
Posts:62
Joined:Tue Feb 27, 2018 8:34 pm

Re: Calculating Max Allowable Pension Contribution (Tax Relief)

Postby ben_power » Tue Mar 16, 2021 9:39 pm

You might also want to consider the benefits to paying into your company scheme not the SIPP. Salary sacrifice will mean you also bypass paying National Insurance which you will not be able to claim back within the SIPP, which also saves you 12% in addition to the 20% basic rate tax.

You would need to be careful to ensure that you still receive sufficient income from your employer to pay NI though and still build state pension years. You will also find that your company scheme will likely be significantly cheaper than your SIPP and whilst it may not give you the same level of investment choice you should still have options.

As an IFA, I always look at the company scheme first especially if they offer salary sacrifice, you can always consider transferring out/away once you leave.

iwmtaxadvisor
Posts:23
Joined:Wed Sep 09, 2020 5:12 pm
Contact:

Re: Calculating Max Allowable Pension Contribution (Tax Relief)

Postby iwmtaxadvisor » Mon Jun 28, 2021 1:32 pm

This issue of a company money purchase pension being cheaper than a SIP is said a great deal but rarely analysed.
There are two levels of charges to talk about, one is the administration and one is the fund charge, assuming the company doesn't have a SSAS and forces you to invest in funds. On the first level, if a SIP costs 450 per year, then since the company pension account usually charges 0.4% (check it and add any initial charges), you'll be better off in a SIP over roughly 100k. On the second count, if funds have a real cost of investing (and that means the OCF disclosed charge plus all the undisclosed charges), there's a 0.5% to 2.5% disadvantage with a non-SIP personal pension. (For those using ETFs, I'm including those. I refer you to the finding that when you add non disclosed charges to the OCF, the 'cost of investing' for an ETF varies between 0.5% and 1.5% p.a.). So that means at about 50k the SIP would be less expensive. This is not part of IFA training, BTW.

In practice, if one is seeking to reduce charges, one considers a sweep of all money purchase pensions into one account (possibly a SIP) at 50k+, and to consider direct investment as soon as possible, as soon as the total amount under management is 250k+. IFA training says SIPs are more risky - clearly that depends upon what you invest in, and how diversified you can get it. You don't need 100 securities in a sector to get specific risk diversification. The text books say 8 will do it.

Let me also say how important these charges are. For the average high net worth individual, investing directly and reducing administration charges will add between 100k and 500k over 20 years.
- look for us on Google "iWMTaxAdvisor"


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