Can i contribute more than £40k into a SIPP but no carry forward?

[Rajput1962]

Hello, I wonder if someone could explain if i can pay in more than £40k into my SIPP but which isn't anything to do with carry forward? I am a saver rather than a spender and have modest outgoings, and have built up a nest egg from previous higher earnings/bonuses. I’ve dropped out of the fast lane and into something more modest. I’m age 56, and intend to work until say 58, or maybe 60. I fill out a self-assessment form each year.

My current annual situation:
salary: c£45k
non-ISA dividends: c£5k
bank interest: nominal but say £200.
Annual DB scheme contributions (inc. employer's): c£10k
pension already paying out from another scheme: c£25k
annual income from all sources = c£75k

In tax year 17/18, i opened a SIPP, and paid in 3 x £30k, gross equivalent = £90k post tax relief at 20%, under carry forward for the 3 previous years, and then another gross equivalent £30k for tax year 17/18. This year I’ve paid in another gross £30k into the same SIPP. All of this is to use the overall annual £40k contribution limit, taking into account mine and employer’s contribution into the DB scheme.
However, I’m a bit confused by the £40k annual limit. Can I pay in more than this for this (and future) years? Obviously, this has nothing to do with any carry forward allowances for previous years, or at least I don’t think so, as they’ve all been used up.
So is the amount I can contribute, gross equivalent:
a.) only as per the annual limit= £40k?
b.) up to salary = £45k?
c.) up to salary + dividends = £50k?
d.) up to salary + dividends + pension = £75k?
I am assuming that I can’t actually do (d) and use any of the £25k pension income to pay into the SIPP?

I think my dividends this year will be higher than last year, having invested previous ISA cash into equities. Say £10k? I might be in line for a promotion, which might boost my salary to £50k. Will it therefore be (b) or (c) suitably increased by the dividends and salary amounts? For this year and then next year?

[JohnB]

The combined contributions from you and your employer into all pensions must not exceed your earned salary or £40k, after tax relief. DB schemes have special rules calculating nominal contributions based on benefit levels, which you must include in the £40k. Income must be earned, dividends and interest don't count

If DB contributions are £10k, and you are paying in from taxable income into a SIPP, you put in £24k and get £6k of tax relief.

If you start drawing a pension, you need to read up on recycling rules. I don't understand them, and rather regard reinvesting to get more tax relief as cheating.

If you get a promotion, and are on final salary rather than career average, you DB benefit will jump, and that is regarded as a one-off contribution in the promotion year. You could be stung by that.

[TUK020]

My very limited understanding of this topic is that the moment you start taking taxable benefits from a pension that your contributions to other pension schemes are then limited to £10k/annum.
I suspect you may need to seek professional advice on this topic.

[Wizard]

My very limited understanding of this topic is that the moment you start taking taxable benefits from a pension that your contributions to other pension schemes are then limited to £10k/annum.
I suspect you may need to seek professional advice on this topic.

As said above you urgently need to take professional advice. AFAIK if you have been drawing down a pension you were limited to £10k pa, but recently that went down to £4k. I think like the pre-draw down £40k limit you can contribute more, but should not claim any tax relief on the additional contributions. From your post you may have claimed significant tax relief you were not entitled to.

The Money Purchase Annual Allowance (MPAA)

The Money Purchase Annual Allowance was introduced on 6th April 2015 and was set at £10,000 gross p.a. The government has now reduced the MPAA to £4,000 gross p.a. which applies to contributions made from 6th April 2017.

If you have taken flexible benefits which include income, such as an ‘Uncrystallised Funds Pension Lump Sum (UFPLS)’ or flexi-access drawdown with income, and you want to continue paying contributions to a defined contribution pension scheme, you will have a reduced annual allowance of £4,000 p.a* towards your defined contribution benefits. The reduced allowance will apply if you have withdrawn more than the 25% tax free pension commencement lump sum (PCLS). The reduced amount is known as the ‘money purchase annual allowance' (MPAA) and includes both your own contribution and any other contribution paid on your behalf, such as an employer or a third party. You cannot bring forward any unused annual allowances from the previous three tax years to warrant a higher contribution than £4,000 towards your defined contribution benefits.

The money purchase annual allowance will only start to apply from the day after you have taken flexible benefits and so any previous savings are not affected. 

https://www.pensionsadvisoryservice.org ... -allowance

[OLTB]

Just a couple of pointers:

You can pay as much as you want into a pension but you only get tax relief on the first £40k (a net contribution of £32,000). Your existing annual contributions of c£10k count towards this figure.

The £4k annual allowance (MPAA) only kicks in when you draw income from a DC scheme - if you only draw tax free lump sum (or PCLS) then the MPAA doesn't apply. You mention 'pension already paying out from another scheme: c£25k' - if this is from a DB pension then this income doesn't matter a jot in relation to the MPAA as the income is from a DB source rather than a DC scheme. If it's from a DC source then it will matter.

Dividends aren't classed as earned income and therefore not included as income for pension purposes (not really an issue as your earnings are £45k).

Cheers, OLTB.

[ursaminortaur]

Just a couple of pointers:

You can pay as much as you want into a pension but you only get tax relief on the first £40k (a net contribution of £32,000). Your existing annual contributions of c£10k count towards this figure.

The £4k annual allowance (MPAA) only kicks in when you draw income from a DC scheme - if you only draw tax free lump sum (or PCLS) then the MPAA doesn't apply. You mention 'pension already paying out from another scheme: c£25k' - if this is from a DB pension then this income doesn't matter a jot in relation to the MPAA as the income is from a DB source rather than a DC scheme. If it's from a DC source then it will matter.

Dividends aren't classed as earned income and therefore not included as income for pension purposes (not really an issue as your earnings are £45k).

Cheers, OLTB.

The MPAA situation is even more complicated than described. It only applies if you are drawing down income from a DC pension and there are circumstances where even then it might not apply. In particular if the drawdown was started before the new pension freedoms came into affect in April 2015 then you would only have been able to drawdown upto a limited amount known as the GAD limit which was based upon comparable annuity rates. If after April 2015 you still kept your drawdown from such an older pension below that limit then the MPAA limit would not apply. If your drawdown exceeded that limit though the MPAA would then apply from that point onwards.
Note since this only applies to DC pensions in drawdown it also doesn't apply if you used your pension to purchase an annuity. The MPAA limit also only applies to further contributions to DC pensions so doesn't affect your ability to contribute to a DB pension upto the normal annual limit.

[Alaric]

You can pay as much as you want into a pension but you only get tax relief on the first £40k (a net contribution of £32,000).

Putting more in than the tax relief limit is volunteering to pay tax on the capital value of your savings, since you would be taxed on amounts withdrawn from pension schemes.

[kempiejon]

You can pay as much as you want into a pension but you only get tax relief on the first £40k (a net contribution of £32,000).

Putting more in than the tax relief limit is volunteering to pay tax on the capital value of your savings, since you would be taxed on amounts withdrawn from pension schemes.

I'm pretty sure it takes that capital out of your estate for IHT planning, and if you're expecting to be a clever investor and make large capital gains it's protected from that tax too as would all the dividends.

[Chrysalis]

As others have said, you need to get advice from a tax accountant, if you have not done so already.

One important issue I don't think has been emphasised in the comments so far is the need to identify exactly how much annual allowance your DB contributions are taking up. This has NOTHING do to with the actual monetary amounts you pay in, but is determined by a fairly complex calculation based on the increase in your scheme pension entitlement. this in turn is determined partly by the scheme accrual rate, but also can be impacted on by any pay rises you receive.

Your scheme should provide you with an annual allowance statement if you request one (although they are only calculated retrospectively so won't help with this year). This will give you the information to determine whether you have over contributed in previous years.


Others have already commented on the MPAA (not applicable if you have taken a scheme pension) and that the annual allowance of 40k includes DB and employer contributions and is absolute, even if your earnings are more than that (dividends, interest and pension income are not earnings).

HTH. btw, if you have exceeded the annual allowance, its not a major crime or anything, but you will have to pay an additional tax charge.

[Rajput1962]

Thank you all for your comments. Just to clarify, the £25k pension is from a previous DB scheme. 30 odd years ago I planned to retire at 55, and I did. I will of course get some more advice just to double check, though I've submitted tax forms and written to the tax man about all of this, without any issues being flagged. This ‘old’ DB pension is what I effectively live on. As it’s not from a DC scheme I don’t think any of the MPAA stuff applies.

In effect I retired at 55 from employment; however, not wishing to be idle, i got myself a new job which has a career average DB pension scheme to go with it. It won’t pay out until 67; i don’t plan on being there that long!

The job’s salary as earned income funds the SIPP. So, I contributed approx. net £24k, and got £6k relief. The carry forward was funded from previous earnings/savings. There’s been no ‘recycling’.

I’d like to do a bit of IHT planning and maybe there’ll be some decent growth in future years. Or I might need it for personal health care. Hence the SIPP.

As far as I can see, I can pay in up to earned salary but no relief in excess of £40k? So, the extra £5k would get no relief? But I can pay it in?

What puzzles me is how does anyone get higher tax relief if the total amount that attracts relief is only £40k?!

[Rajput1962]

...just one more thing, as i pay 20% tax on my DB pension, can i not pay that into the SIPP? I'm not recycling any tax free amount. I could cash in some non-ISA investments and live off and run those down instead?

[Alaric]

can i not pay that into the SIPP?

You can only pay earnings from employment into a SIPP other than the minimum gross £ 3600 that everyone is entitled to.

[ursaminortaur]

can i not pay that into the SIPP?

You can only pay earnings from employment into a SIPP other than the minimum gross £ 3600 that everyone is entitled to.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100

For the avoidance of doubt a pension is not classed as earnings and cannot be included in the definition of relevant UK earnings.

[ursaminortaur]

What puzzles me is how does anyone get higher tax relief if the total amount that attracts relief is only £40k?!

The contributions are considered to have been made from the highest taxed parts of your earnings. So if you earned £56350 ie £10k into the 40% band for 2018-2019 and contributed £10k gross then it would attract 40% relief (20% paid into the pension and 20% more reclaimed by filling in your self-assessment tax return). If instead of £10k a larger contribution was made then the amount above £10k would only attract 20% relief in this case since you only paid 40% tax on £10k of your salary.

[OLTB]

I would also just make a comment about your lifetime allowance and to be aware of your existing plans and future contributions.

Your existing DB scheme pays you £25k p.a. which is £500,000 (pension multiplied by a factor of 20 + any PCLS that may have been drawn) towards your lifetime allowance of £1,030,000 - you will have received a letter stating what percentage of your LTA was utilised when this was drawn. You are building up a further DB scheme and also chucking money into your SIPP (£150k at the last count). You shouldn't have an issue at the moment, but just something to keep an eye on I think.

Cheers, OLTB.

[Chrysalis]

To the OP - have you read my post??
You need to obtain an annual allowance statement for your new DB scheme. The amount of annual allowance you have used up with those contributions is nothing to do with the amount of money you have put in, and everything to do with the amount of benefit you have purchased. The link below, if you scroll down to the bit about DB pensions, should explain:

https://www.pensionsadvisoryservice.org ... -allowance

[Chrysalis]

Also, reading through your original post a bit more closely, am I correct that the years that you used the carry forward relief for are years when you were contributing to your old DB pension? (since you took that at 55 and you are now 56).
In which case you need to check how much AA you used up in those years with the first DB pension contributions.

You are correct, if the pension you are drawing is a DB pension then the MPAA won't apply. But I am not sure you are fully aware of the AA rules for DB pensions. A tax accountant would keep you straight on all this.

[TUK020]

Possibly worth cross posting this thread to "Pensions Practical"