This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. To find out more about cookies on this website and how to delete cookies, see our Cookie Policy.
Analytics

Tools which collect anonymous data to enable us to see how visitors use our site and how it performs. We use this to improve our products, services and user experience.

Essential

Tools that enable essential services and functionality, including identity verification, service continuity and site security.

Where Taxpayers and Advisers Meet

Excess pension savings impact on adjusted net income

GLam
Posts:2
Joined:Tue Aug 10, 2021 9:58 pm
Excess pension savings impact on adjusted net income

Postby GLam » Tue Aug 10, 2021 10:17 pm

Hi all,

Say I exhausted the pension annual allowance of £40k this year including all carry forward allowances, if I were to save any further amounts into my pension (such excess amounts therefore subject to annual charge) would these (excess) pension contributions still count towards the calculation of the adjusted net income (for assessing personal allowance purposes)?

For example, before incurring annual charge I have paid 40k into pension (via net pay, and assuming no carry forward) and I still have adjusted net income of 120k income (after aforementioned pension contribution) - if I then decide to then pay another 20k into pension via net pay (so will incur annual charge on the additional 20k contribution), will my adjusted net income be 100k and thus retaining the full personal allowance?

I'm trying to decide whether saving in excess of the annual allowance is an option if it means I am able to validly preserve my personal allowance under the above circumstances.

Thanks in advance!

someone
Posts:692
Joined:Mon Feb 13, 2017 10:09 am

Re: Excess pension savings impact on adjusted net income

Postby someone » Sat Aug 14, 2021 5:55 pm

I don't know - but the whole pension regime is smothered in weird corner cases like this. Another one is whether overpaying can reduce your threshold income and so avoid the taper.

The problem is going to be deciding whether when the tax charge is assessed it's calculated on your marginal rate or added back onto your income before tax is assessed. I've just had a look at my 2017/18 return where I had a tax charge:

From my tax return:
10 Amount saved towards your pension, in the
period covered by this tax return, in excess of the
Annual Allowance
1421.00

From my tax calculation:
Income Tax due £a-lot
plus Total pension savings charges (£639.45 minus tax treated as paid £0.00) £639.45


So the way the calculation is done by HMRC they appear to add back on the tax relief to your tax bill rather than adding the amount to your income before calculating the tax due so I'd guess the annual allowance taper isn't affected by the charge.

(You can probably try it online, fill in your tax return with 100K income, 20K pension in excess of the annual allowance and see what the tax is calculated as. move the 20K to make 120K income and see what it is then. They should differ by 4K if the annual allowance isn't tapered. - my tax return is (almost) completed but not yet submitted so I don't want to mess around with it to try it out)

But note that HMRC isn't noted for getting these corner cases correct.

IMO I wouldn't pay into a pension for 20% tax relief - you'll (probably) be taxed at at least that rate taking it out too. And 20% is all you'll get trying this wheeze. And you'll also risk having to defend it through tribunal even if HMRC eventually lose as I'll bet the assumption will be that you should pay tax to match the tax relief even if the legislation doesn't achieve that in this case.


Return to “Income Tax”