The annual limit is currently £60 000.00. Is this inclusive of the 20% tax relief meaning maximum 50 000.00 plus 20% which is 10 000.00 totalling the 60 000.00
…or can you add the maximum of 60 000.00 and then get the 20% relief of 12 000.00 on top of that totalling 72 000.00 that goes into your pension pot.
I have successfully confused myself, and looking on the Tax on your private pension contributions: Tax relief - GOV.UK website, it does not make it clear for me which one of the two options it is. Either that or I do not know how to interpret what they say…
actually @UncleBob it is yet different again from your possibilities :-
The 20% relief is based on the £60k limit, ie. £12k.
Put £48k of your after-tax income in your private pension and your provider will ask HMRC for £12k to top it up with. So, the 48k contribution is actually increased by 25% - not a bad return.
3 things to note though :-
- at least £60k (before tax) must have been earned in the relevant tax year.
- any unused allowance from prior 3 years can be carried forward to allow a contribution >48k, again as long as you earned at least that amount in the relevant tax year.
- if you did put £48k into a pension, you must have earned at least £60k. That means some of your pay was taxed at 40%. You can then ask HMRC for the rest of the 40% tax you paid back, as your pension provider will only obtain 20% relief for you.
The aim by HMRC is to give back the income tax amount that was taken originally during the tax year of the pension contribution.
Note that pension providers generally let you exceed the £60k allowance and will obtain the 25% on top for the full amount - as you may be using carry-forward so are entitled to exceed the annual allowance. The tax man will be in touch if you weren’t actually entitled though.
None of that is explained in the linked HMRC guide from what I can see. Most contribute via employer though - it is easier to see how the £60k fits in if it is taken from gross pay before calculating net pay, but the effect is the same.
2 Likes
Hi @nedjohn Thanks for that answer. In order for it to make sense on what I’m trying to do I will spill the beans, so to speak.
Firstly my salary is over 60K, so that box is ticked. I have two pensions; one from my employer with aviva where I salary sacrifice and another private one with standard life which I have had for over 20 years. It is with this second, privately funded one that I had the confusion with.
For both pensions I know what the total contributions are for each tax year. The problem I had was when adding the two pensions together to get a combined annual total, I simply used the gross amount that my employer pays into the works pension to get the annual total. With the private paying pension, I dont know how to add the total contributions; just what I paid in, or what I paid in plus the tax relief.
Therefore if I add the two pension contributions together I get a smaller total sum when I exclude that tax relief or a larger amount if it includes it.
Coming back to your comment about using the previous years’ remaining allowances, this is indeed what I am trying to achieve. I received a handsome unexpected windfall so max’ing out my ISA and pensions are on the menu. HMRC has a calculator where you add all your annual contributions and then it pops out how much you can still pay in; Check if you have an annual allowance tax charge on your pension savings - Check if you have an annual allowance tax charge on your pension savings - GOV.UK
It’s using this calculator that I am unsure of which numbers of the private pension to use.
It is asking how much went into pensions - you would need the gross amount that went in for the calculator to derive unused allowance.
That is: your contributions plus the tax relief.
Be careful when aligning tax relief with personal contributions if working from payments statements, particularly at the end of the tax year. It is the tax year of the contribution that matters, the linked tax relief should be allocated to the contribution tax year.
NOTE that assumes DC pensions. Calculations are different for final salary pensions.
1 Like
Thank you very much for this and all the other information you supplied. I now know exactly where I stand.
Hello @UncleBob
Something I noticed I believe of interest to you. In Interactive Investor - it answers the question: what pension contributions are relevant when judging how much annual allowance remains.
Their answer :-
“You can contribute 100% of your annual income to your SIPP each tax year, up to the maximum annual allowance of £60,000. This annual allowance includes personal contributions, employer contributions and tax relief.”
They are talking about the current year, but the principle is the same whether current or prior years. They also talk about carrying forward. See link.
II explanation on annual allowance
They agree: factor in tax relief payments as part of your annual allowance consumption calculations.
Thanks @nedjohn you are the proverbial Rock Star!
Funny how you have to go out of your way to get, what I consider rather important snippets of information, you would expect to get from the taxman itself in stead of from 3rd parties.