Pension compensation

[SuperSpurs106]

Hi

I have a client who is due some compensation in relation to poor (previous) pensions advice. I believe that this is to be paid into a pension.

Is it right that the compensation payment will be classed as a third party contribution and receive tax relief? My client does not have any pensionable income so will he be hit with an annual allowance charge because the compensation paid in will be higher than his pensionable income?

TIA

[Jholm]

Unlikely to receive 'tax top up' unless made by him directly, in which the same way an employer contribution wouldn't get toped up. Circumstances might make it better for him to be paid directly, then make the contribution himself to receive tax relief.

However, it sounds like he has the minimum relevant maximum of £3,600 gross. This will be the limit on which tax relief can be obtained, which might make the whole point above redundant. Contrary to what you suggest, this is not going to give rise to a charge but the relief obtained will be restricted to the maximum of £3,600 (eg. higher rate tax band adjustment).

Prob has a £40,000 annual allowance and can use any unused from the prior 3 tax years. Only total contributions in excess of this will give rise to an annual allowance charge.

Also might need to consider lifetime allowances, albeit unlikely based on info provided, since nothing to suggest there has been a benefit crystallisation event.

[SuperSpurs106]

Unlikely to receive 'tax top up' unless made by him directly, in which the same way an employer contribution wouldn't get toped up. Circumstances might make it better for him to be paid directly, then make the contribution himself to receive tax relief.

However, it sounds like he has the minimum relevant maximum of £3,600 gross. This will be the limit on which tax relief can be obtained, which might make the whole point above redundant. Contrary to what you suggest, this is not going to give rise to a charge but the relief obtained will be restricted to the maximum of £3,600 (eg. higher rate tax band adjustment).

Prob has a £40,000 annual allowance and can use any unused from the prior 3 tax years. Only total contributions in excess of this will give rise to an annual allowance charge.

Also might need to consider lifetime allowances, albeit unlikely based on info provided, since nothing to suggest there has been a benefit crystallisation event.

Thank you for responding.

I got the notion of tax relief on the compensation payment from this article...

https://www.investcentre.co.uk/articles/compensation-payment-complications

He will only have a £3,600 annual allowance.

If, say, £20,000 is paid in and it is, indeed, grossed up to £25,000 am I right in thinking the annual allowance charge would be £25,000 minus £3,600 multiplied by 20% to give a charge of £4,280?

[Jholm]

In the nicest way, I believe you are still confusing matters. The £3,600 is the limit places on tax relief, based on his 'relevant maximum'.

Entirely separate is the current year standard annual allowance of £60,000. This is reduced (by £1 for every £2 over the adjusted income limit) if a taxpayers threshold income is over £200k and adjusted income is over £260k.

After tapering, the minimum annual allowance for current year is £10,000, so can't be the case the £3,600 is his annual allowance.

[Jholm]

So based on those numbers, if he doesn't have high enough income to reduce the standard AA, then there are no charges. But tax relief will be restricted to £3,600 (ie basic rate bands won't get full extension)

[SuperSpurs106]

Ok, maybe my wording was a bit clumsy.

The maximum tax relivable contribution he can make is £3,600.

By way of this compensation, his pension will receive a third party contribution of £20,000. This will receive £5,000 tax relief.

By what mechanism/charge will this be corrected?