Max pension contribution cross-check

[Degsy67]

Just checking my understanding. Looking for a few responses from knowledgeable Lemons to confirm or correct the details below.

My wife does not have regular employment income this tax year. She was previously a teacher and has received some ad hoc income during the course of the year in relation to exam marking. This income is dealt with via PAYE however she has a tax code which means she receives the income without any tax deducted as any income earned will fall well below her personal allowance. No employer or employee pension contributions are taken from this income. The only deductions are NI contributions.

Alongside her deferred Teachers Pension, she has a SIPP which we contribute to. Our aim is to maximise pension contributions, maximise tax advantages and stay inside the relevant annual pension allowance. There are no issues with lifetime allowances to worry about. There are no options to use carry forward rules as we have utilised carry forward over the past few years to max out contributions when she was working. No contributions are being made to any other pension plans by employers or by my wife.

There are no added complexities around unsheltered dividend income or savings interest to worry about. There are no additional personal sources of income.

If she didn't earn anything at all this year then she would be allowed to contribute £3,600 to the SIPP. The contribution would consist of a personal contribution of £2,880 and a tax refund of £720, with the tax reclaimed automatically into her SIPP by her SIPP provider (AJ Bell).

1. Is the above correct?

I understand no changes were announced in the November budget around the amount which can be contributed to a pension before income is considered - ie, next year (subject to any emergency Brexit budget changes) she can contribute £3,600 again even if she receives no income.

2. Is the above correct?

Through the ad hoc work she has undertaken this year she will have earned approximately £4,000 which we intend to pay 100% directly into her SIPP. Due to the personal allowance, no tax has been deducted from the £4,000. When this is paid into her SIPP, the SIPP provider will 'reclaim' tax at 20% - ie, £1,000. So, £4,000 of untaxed earnings will be boosted by 20% to £5,000 by paying it into the SIPP.

3. Is the above correct?

Thanks in advance for checking my understanding.

Degsy

[kempiejon]

Through the ad hoc work she has undertaken this year she will have earned approximately £4,000 which we intend to pay 100% directly into her SIPP. Due to the personal allowance, no tax has been deducted from the £4,000. When this is paid into her SIPP, the SIPP provider will 'reclaim' tax at 20% - ie, £1,000. So, £4,000 of untaxed earnings will be boosted by 20% to £5,000 by paying it into the SIPP.

3. Is the above correct?

I think you have 1 and 2 correct but I don't have your opinion on number 3. I'm ready to be corrected but I think if she had £4000 of relevant income that would be the maximum she could contribute to the pension so she'd actually need to contribute the net amount and have the tax reclaim to make it up to £4k maximum. So her net would be £3200.

[Chrysalis]

I agree with Kempiejohn. The maximum contribution is 100% of earnings - this includes the tax reclaim. (Even though no tax has been paid)

[OLTB]

kempiejon is correct - the £4k maximum contribution will be once tax relief of £800 has been added on to your wife's contribution of £3,200.

Cheers, OLTB.

[Degsy67]

Many thanks to all who corrected my mistake and have set me straight. Glad I checked and avoided a tax error.

Degsy

[genou]

Many thanks to all who corrected my mistake and have set me straight. Glad I checked and avoided a tax error.

Degsy

I'm late to this, as I've been away. The maximum contribution is the lower of the annual allowance and Net Relevant Earnings : https://www.gov.uk/hmrc-internal-manual ... 0#earnings ,

so your wife can contribute the full 4K, and will get it topped up by 1K, i.e you were right the first time round.

[Chrysalis]

genou I'm really not sure that is right. The maximum amount of pension contribution on which you can claim tax relief includes the tax relief, I'm pretty sure.
So, if your earnings are 4k, then the max contribution is 4k including the tax relief - so you pay in 20% less than that.

If your maximum is the 40k annual allowance, then again that includes the tax relief that is added - its not 40k that you put in and get tax relief on top.

But Degsy, you can always ask a tax accountant or even call HMRC and ask them. Or maybe your broker might confirm.

[Chrysalis]

And if you are paying into a pension under the de minimis rules as a non earner, then you put in £2880 and get topped up to £3600, you don't put in £3600 and get the top up in addition...

[OLTB]

genou I'm really not sure that is right. The maximum amount of pension contribution on which you can claim tax relief includes the tax relief, I'm pretty sure.
So, if your earnings are 4k, then the max contribution is 4k including the tax relief - so you pay in 20% less than that.

If your maximum is the 40k annual allowance, then again that includes the tax relief that is added - its not 40k that you put in and get tax relief on top.

But Degsy, you can always ask a tax accountant or even call HMRC and ask them. Or maybe your broker might confirm.

Yes, just to reiterate Jabd2001's comment above, if this was the case and Mrs Degsy earned £50,000 p.a., the contribution maximum (annual allowance given the previous assumptions of carry forward etc.) is £40,000 so Mrs Degsy would write a cheque for £32,000 and tax relief would make this up to £40,000. I can't see that she would write a cheque for £40,000 and get tax relief on top of this so that the gross contribution would be £50,000 as this would break the AA contribution limit.

Cheers, OLTB.

[genou]

genou I'm really not sure that is right. The maximum amount of pension contribution on which you can claim tax relief includes the tax relief, I'm pretty sure.
So, if your earnings are 4k, then the max contribution is 4k including the tax relief - so you pay in 20% less than that.

If your maximum is the 40k annual allowance, then again that includes the tax relief that is added - its not 40k that you put in and get tax relief on top.

But Degsy, you can always ask a tax accountant or even call HMRC and ask them. Or maybe your broker might confirm.

Yes, just to reiterate Jabd2001's comment above, if this was the case and Mrs Degsy earned £50,000 p.a., the contribution maximum (annual allowance given the previous assumptions of carry forward etc.) is £40,000 so Mrs Degsy would write a cheque for £32,000 and tax relief would make this up to £40,000. I can't see that she would write a cheque for £40,000 and get tax relief on top of this so that the gross contribution would be £50,000 as this would break the AA contribution limit.

Cheers, OLTB.

But Mrs Degsy has earned 4K and there is no tax paid . In this situation you can pay in your entire NRE and get a free top up. It's the same logic as the 2880/720, which is just an arbitrary freebie if you have no earnings. I believe it works as I say for all earnings up the personal allowance.

In the 50k case you can write a cheque for 40k and you will get relief up to the tax you have paid, but not more ( usually in two tranches - 20% inside the pension, and the balance via the ITR calculation ).

These guys seem to agree with me - https://www.moneyadviceservice.org.uk/e ... tributions

[Chrysalis]

But genou you are not using the same logic as the £3600 allowance for non earners. The allowance is £3600, but the most you can pay in is £2880, not the full £3600.

The MAS link, as far as I can see, doesn’t discuss the situation where someone has earnings of more than £3600 but is still not a tax payer.

I really don’t think you can get tax relief (or top up) on contributions more than your earnings (if they are more than £3600) in any circumstances. But, it’s up to Degsy (or more accurately his wife) to ultimately decide what to do.

[genou]

I really don’t think you can get tax relief (or top up) on contributions more than your earnings (if they are more than £3600) in any circumstances. But, it’s up to Degsy (or more accurately his wife) to ultimately decide what to do.

I'm not saying you can get tax relief (or top up) on contributions more than your earnings . What I am saying is that the maximum contribution is your NRE / 40K. There is no funny money working out of net contribution plus tax relief. There is an arbitrary minimum contribution of 2880, which is grossed up to 3600. Most people don't encounter this because if you are on 11k a year, you are not very likely to contribute 11k to a pension. but to be clear :

if you have earnings of 11,850 this FY, you can contribute 11,850 and it will be given an in-pension top up of 2,962.50, despite the fact that you have paid no tax. If you put in 40k ( assuming you have NRE of =>40k ) it will get a 10k top-up, and the higher rate consequences will be worked out as part of SA.

These guys agree with me - https://www.hl.co.uk/pensions/tax-relief . ( see the section "Pension tax relief" ) .

[swill453]

These guys agree with me - https://www.hl.co.uk/pensions/tax-relief . ( see the section "Pension tax relief" ) .

No, they don't agree.

They say "You should ensure that you do not contribute any more than 100% of your earnings after tax relief has been received" so in the OP's situation, only £3200 could be contributed before tax relief.

Scott.

[BrummieDave]

No, they don't agree.

They say "You should ensure that you do not contribute any more than 100% of your earnings after tax relief has been received" so in the OP's situation, only £3200 could be contributed before tax relief.

Scott.

Spot on Scott.

And if Genou wants further proof, go back to the HL link and use the calculator they provide lower down the page. Enter £4,000 in both boxes, the amount you would like to contribute and the total amount you have earned, and it will show that you should therefore pay in £3,200 into your SIPP and have HL collect the balance of £800 from HMRC.

[genou]

No, they don't agree.

They say "You should ensure that you do not contribute any more than 100% of your earnings after tax relief has been received" so in the OP's situation, only £3200 could be contributed before tax relief.

Scott.

Spot on Scott.

And if Genou wants further proof, go back to the HL link and use the calculator they provide lower down the page. Enter £4,000 in both boxes, the amount you would like to contribute and the total amount you have earned, and it will show that you should therefore pay in £3,200 into your SIPP and have HL collect the balance of £800 from HMRC.

Ok. I fold.

[dfrgth]

Surely the section on contributions for non-taxpayers is the only one that is relevant.

If you’re not earning enough to pay Income Tax, you’ll still qualify to have tax relief added to your contributions up to a certain amount.

Thus if you are a non-taxpayer of any income amount, be it; £0, £4,000 or £11,000 the max you can contribute and get tax relief is £2,880 or am I reading the rules wrong.

[swill453]

Thus if you are a non-taxpayer of any income amount, be it; £0, £4,000 or £11,000 the max you can contribute and get tax relief is £2,880 or am I reading the rules wrong.

Wrong I'm afraid. As alluded above, you can contribute based on your earnings, whether or not you actually paid tax.

So someone earning £11,000 could contribute a gross amount of £11,000, which would include £2,200 "tax relief" refunded by HMRC.

Scott.

[Degsy67]

Well I’m glad to see that I’m not the only one who is confused about the rules!

I’m going to use the HL calculator as my ‘source of truth’. Thanks for the link and all the input and discussion.

Degsy

[dfrgth]

Wrong I'm afraid. As alluded above, you can contribute based on your earnings, whether or not you actually paid tax.

So someone earning £11,000 could contribute a gross amount of £11,000, which would include £2,200 "tax relief" refunded by HMRC.

True, you can contribute based on your earnings so someone earning £11,000 could contribute a gross amount of £11,000 but that would only include £720 tax relief and that only if your pension provider claims tax relief for you. The HMRC tax site states that as a non-tax payer you get tax relief on the first £2,880 you pay into your pension.

[Chrysalis]

I actually had this same debate on an FT BTL discussion. The HMRC and MAS guidance certainly give the impression that a non taxpayer can only get £720 tax relief. However, it is also clear from other HMRC guidance that tax relief is available on 100% of earnings (subject to AA).
Eventually the debate was resolved thus: a non taxpayer only gets AUTOMATIC tax relief on the first £3600. However, they can still get relief on the rest of their earnings, but may have to demonstrate (or simply declare) to their provider that they have the relevant earnings in order to get the relief added.

Confused? Is the guidance misleading? Yes, and yes.

But, I’m pretty sure that all you need to do to get the full relief via the kinds of platforms we tend to use, is simply complete an online box saying how much you earn.

I may be testing this myself next tax year, if I remember I’ll report back. Or maybe Degsy will let us know how he gets on...