Employer Pension Contributions

[EasilyConfused]

Would really appreciate if one of the many pensions experts on this forum could conclusively answer this.

From research, I understand the £40k limitation with the ability to top up the the last three years unused allowances. I understand this applies to the total payments from both Employer and Employee.

However there is also another restriction that tax free payments in any tax year cannot exceed the Employees total earnings in that year. Some sites stop there, but others qualify that this second restriction only applies to payments made by the Employee, not the Employer.

This is very important to me as I am about to take a voluntary severance and my Employer allows election of a proportion of the total payments to be made direct by them into the DB Pension scheme.

I'm keen to max out based on the unused element of this and the previous three years. But that would be severely compromised if I am limited to this year earnings which will be low (zero going forward).

Are Employee earnings in the current year indeed not considered when assessing maximum tax free Employer contribution?

[kempiejon]

I think the defined benefits schemes have slightly different rules, the increase of the value of your pension income counts towards your limit. I have used the pensions advisory service before for specific questions Website: www.pensionsadvisoryservice.org.uk

However from http://www.hl.co.uk/pensions/sipp/how-m ... tributions their link says that the company can pay in the maximum of £40k annually and make use of the catch up. Many self employed will put surpluses into their pensions above their earnings.
Last year and this I will put all my net earnings into pensions and a year ago I tried to catch up unused annual amounts but didn't have enough earnings to be able to get as much cash locked away as quickly as I had hoped for.

[EasilyConfused]

My bad, sorry. I meant to type DC. My employer operates a DC scheme.

[EasilyConfused]

[quote="kempiejon"]I think the defined benefits schemes have slightly different rules, the increase of the value of your pension income counts towards your limit. I have used the pensions advisory service before for specific questions Website: http://www.pensionsadvisoryservice.org.uk

Many thanks for your reply. Yes, that link you sent was one of those I saw that suggested the Employer us not limited by the Employees income that year.

I did try the Pensions Advisory Service, but I guess the experience of their operators is mixed. The chap I engaged with didn't really seem to know much and was clearly just cut and pasting from a standard FAQ set.

Your advice certainly suggests I should be ok as long as I don't exceed the £160k over four years. Many thanks again for your time. Bear in mind though, I will be looking to have MORE than my total earnings for this year added to my pension.

Any other contributors confirmations gratefully received to further allay my worries before I allocate a large proportion of my total payment to be paid straight into my DC.

[kempiejon]

Of course one or ones employers can pay more than the annual limit into a DC pensions what you'd miss out on is the tax relief. Or if you get the relief there'd be a later charge to your earnings or the pension I think.

[EasilyConfused]

Thanks again. I think I have asked my question badly. Let me take a different approach.

If a severance payment in excess of £30k is awarded. Does the amount over £30k qualify as income/earnings?

So if for example £45k is paid, does that enable £15k to be contributed to a pension that year within the principle of contributions up to the earnings that year (subject also to the £40k pensions savings limit)?

Or is it considered a completely separate payment to earnings and although taxable, not considered as taxable earnings.

[kempiejon]

Ah, I think severance pay-outs do count as earnings. Do these this help? https://www.gov.uk/hmrc-internal-manual ... l/eim13500 or https://www.pensionsadvisoryservice.org ... ur-pension

[OLTB]

Would really appreciate if one of the many pensions experts on this forum could conclusively answer this.

From research, I understand the £40k limitation with the ability to top up the the last three years unused allowances. I understand this applies to the total payments from both Employer and Employee.

However there is also another restriction that tax free payments in any tax year cannot exceed the Employees total earnings in that year. Some sites stop there, but others qualify that this second restriction only applies to payments made by the Employee, not the Employer.

This is very important to me as I am about to take a voluntary severance and my Employer allows election of a proportion of the total payments to be made direct by them into the DB Pension scheme.

I'm keen to max out based on the unused element of this and the previous three years. But that would be severely compromised if I am limited to this year earnings which will be low (zero going forward).

Are Employee earnings in the current year indeed not considered when assessing maximum tax free Employer contribution?

Hi EasilyConfused

HL's carry forward calculator here http://www.hl.co.uk/pensions/interactiv ... calculator is a good place to start. You can tap in your income for this year and the past three years, pension inputs over this year and the last three years and it will let you know what your maximum contribution allowance is. This would be useful to print and keep just in case HMRC want you to prove that you were able to pay in the amount you wish to do. You will have to know what both you and your employer have already paid into your DC pension over the last three years as this will have to be deducted from the total of £160,000 (4 x £40,000).

Employer contributions are not affected by your individual earnings, so it's the £40k annual limit that applies. Just note that you won't get tax relief on top of this though as it's a payment from your employer and not you.

Note that this year's annual allowance (2018/2019) of £40k would be used up first and then you carry forward the allowance from the furthest tax year (2015/2016). I only mention this because if you find new employment this tax year, you may struggle to pay into their pension scheme as you will already have used your £40k annual allowance.

One more thing - since 6th April 2016, if your earnings have exceeded both £110k and £150k there is a tapering allowance scheme in place that potentially reduces the £40k annual limit. It's a little complicated and I won't get into the details - there is information about it here https://www.gov.uk/guidance/pension-sch ... -allowance

Cheers, OLTB.

[melonfool]

I will also add that if any contributions are made by a salary sacrifice scheme then your employer cannot allow your 'earnings' to go under minimum wage.

You can still pay more in, but you can't do it under the salary sacrifice arrangements.

Mel