Author Topic: UK Pensions - tax relief  (Read 1001 times)

Slow road to freedom

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UK Pensions - tax relief
« on: September 08, 2017, 03:36:26 PM »
Hello Everyone

This is, I guess, an easy question for money who are well-versed in pension tax relief. I think I've worked out the answer, but I wonder if anyone can point me to where I can get confirmation - without having the expense of IFA advice...

I'm in the fortunate position of having a reduced annual allowance, as part of my employer's salary sacrifice scheme. This is a fairly recent phenomenon, so I have unused allowance from previous years. I would obviously like to max out my contributions, given the tax relief, but equally I wish to avoid getting my sums wrong and paying tax if I can help it.

There are two parts to questions, both involving sums:

1. How do I calculate what my annual allowance actually is? I suspect it will be close to £10,000, and I've read things about this, but surely there's a reliable ready reckoner?

2. How do I calculate what brought forward unused allowances I can use now?

I have read around the subject, and played with the Hargreaves Lansdown calculator for question 2, but I like to understand what I'm doing as well as having a good check.

Thanks in advance for any help you can offer.
I really want to do things other than work... :-)

Playing with Fire UK

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Re: UK Pensions - tax relief
« Reply #1 on: September 08, 2017, 11:44:51 PM »
Just checking:

By reduced annual allowance, do you mean that you earn over £150k (and £110k threshold income) so are subject to tapering, or do you mean that your work pays into a pension for you, so that takes up part of your £40k allowance leaving a reduced amount for your private contributions?

Slow road to freedom

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Re: UK Pensions - tax relief
« Reply #2 on: September 08, 2017, 11:51:42 PM »
Just checking:

By reduced annual allowance, do you mean that you earn over £150k (and £110k threshold income) so are subject to tapering, or do you mean that your work pays into a pension for you, so that takes up part of your £40k allowance leaving a reduced amount for your private contributions?

Thank you for checking. I'm subject to tapering, but am confused about how to calculate.
I really want to do things other than work... :-)

Playing with Fire UK

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Re: UK Pensions - tax relief
« Reply #3 on: September 08, 2017, 11:58:05 PM »
The best explanation I've found is here. I don't have first hand experience though.

Slow road to freedom

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Re: UK Pensions - tax relief
« Reply #4 on: September 09, 2017, 05:29:26 AM »
Thanks PWF. Luckily my situation is relatively simple (he says): income from a job, employer pension contributions, some P11D benefits - but not much else.

I guess the worst case scenario is I pay tax on any 'excess' employer contributions.
I really want to do things other than work... :-)

dreams_and_discoveries

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Re: UK Pensions - tax relief
« Reply #5 on: September 09, 2017, 06:23:46 AM »
Is the pension a DC or DB scheme?  DB schemes should tell you the "value" of the contribution for annual limits purposes.

Slow road to freedom

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Re: UK Pensions - tax relief
« Reply #6 on: September 09, 2017, 07:50:09 AM »
Is the pension a DC or DB scheme?  DB schemes should tell you the "value" of the contribution for annual limits purposes.

Hi dreams_and_discoveries
It's a DC scheme.
I really want to do things other than work... :-)

cerat0n1a

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Re: UK Pensions - tax relief
« Reply #7 on: September 09, 2017, 09:01:36 AM »
There's three things you need to calculate.

1.  How much your allowance this year is. If your "adjusted income" for the tax year is over £150k, your allowance is reduced down from 40k - it goes linearly down £1 for every £2 of income up to £210k, at which point it is £10k - and it can't go lower than that.

https://www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance

2. How much your contributions this year will be if you don't make any extra contributions. This is easy to calculate if you have the same amount going in every month and it's not going to change between now and the end of the tax year. If you will get a bonus paid into the pension, or a payrise, then it's a right pain, but you need to work it out.

3. How much unused allowance you have from previous years. You need to find the contributions for each of the last 3 years Pension Input Periods. If you have multiple pensions, you need to add the figures for all of them. This is where it gets complicated. You need the amounts for the  2013/2014, 2014/2015 and 2015/2016 years. However, the pension input period was not necessarily aligned with the tax year in some pensions in the past. In 2015/2016, this was changed so that they all did align with the tax year and the result was that some people got effectively extra allowance for part of the year. A simple method is to contact your pension scheme, explain that you're worried about annual allowance, want to used carry forward of unused allowance and could they please show the relevant previous pension inputs.

Once you have all of those, you can calculate how much you can contribute into a pension for this year.


Playing with Fire UK

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Re: UK Pensions - tax relief
« Reply #8 on: September 09, 2017, 11:33:13 PM »
Remember that you will lose the carry forward for 2013/14 this year, but the carry forward for the later years will be available next tax year. If you can aim to contribute between (this year's allowance plus 2013/14 carry forward) and (this year plus three years' carry forward) you will have some headroom if your employer contributions change or if your sums are wrong (mine were the first few times I tried to contribute all my 40% tax, it was the P11D benefits that got me).

Slow road to freedom

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Re: UK Pensions - tax relief
« Reply #9 on: November 26, 2017, 01:35:31 AM »
Thanks to everyone that has helped on this thread. Itís taken a while, but I now have clarity.

HMRC actually have an ĎAnnual Allowance Calculatorí that does the sums on annual allowances; once I put in the pension contributions it tells me how much unused allowance is left. No need for a spreadsheet, and perfect as evidence should HMRC decide I need to pay more tax.

The good news is I can keep the contributions at their relatively high level this year - I was considering reducing them significantly by now. FIRE target has had a boost :-)
I really want to do things other than work... :-)

Playing with Fire UK

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Re: UK Pensions - tax relief
« Reply #10 on: November 26, 2017, 03:54:27 AM »
HMRC actually have an ĎAnnual Allowance Calculatorí that does the sums on annual allowances; once I put in the pension contributions it tells me how much unused allowance is left. No need for a spreadsheet, and perfect as evidence should HMRC decide I need to pay more tax.

Urghh, I was so hopeful that this was going to be useful for me.

The first question is "how much have you contributed in this tax year" (except it calls it "pension savings", and doesn't specify net or gross), so it isn't going to be straightforward to answer the question "how much money should I pay in to my pension if I want to pay no 40% tax".

Back to the spreadsheet for me.

Slow road to freedom

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Re: UK Pensions - tax relief
« Reply #11 on: November 26, 2017, 05:49:43 AM »
Quote
Urghh, I was so hopeful that this was going to be useful for me.

The first question is "how much have you contributed in this tax year" (except it calls it "pension savings", and doesn't specify net or gross), so it isn't going to be straightforward to answer the question "how much money should I pay in to my pension if I want to pay no 40% tax".

Back to the spreadsheet for me.

Yep, sorry. Iím a simple soul, so it was enough for me.
I really want to do things other than work... :-)

Playing with Fire UK

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Re: UK Pensions - tax relief
« Reply #12 on: November 26, 2017, 06:16:24 AM »
The "Urgh" was for HMRC, not you UKStu2017!!

You were right to share it, and I'm sure it will be useful for other people :-)

Slow road to freedom

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Re: UK Pensions - tax relief
« Reply #13 on: November 26, 2017, 07:15:29 AM »
I feel that sentiment every time I think of HMRC, I must admit. And thank you for clarifying (not that Iím overly sensitive) 😊
I really want to do things other than work... :-)

dreams_and_discoveries

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Re: UK Pensions - tax relief
« Reply #14 on: November 28, 2017, 06:07:54 AM »
Yeah, they don't make it easy!

Luckily I can keep it simple now, with a straight 40k each year.

I remember the pain of digging out previous years pension statements to work out how much carry forward I had....