Annual allowance limit

[globalarbtrader]

Please sense check my understanding and my maths - this is the first time I've hit this limit.

Brief background, I have sufficient invesment income such that I can contribute 100% of my other income into my SIPP over the last few years (annoyingly investment income such as dividends doesn't count as NRE for SIPP purposes).

Let's suppose I earned £60k from self employment (net profit) and £20k from employment. The employed job comes with a DC pension. For the DC pension I have to contribute 10% of salary and the employer contributes 20% of salary. That works out to £2k and £4k respectively, and as my contributions are made at source this reduces my taxable gross to £60k+£20k-£2k = £78k (my employers contributions don't count towards my earnings).

The most I can contribute to pensions in any one year and still get tax relief is currently the lower of my income and £60k (as I'm below the point where I would start losing my annual allowance); so that's £60k. I've already used £6k of that with the DC contributions, so what I have left is £54k.

And thus the actual cash amount I can contribute is 80% of that, which is £43,200. That will get the usual basic tax relief applied inside the SIPP, grossing it up to £56k, and I will get the higher rate tax relief through my annual self assessment.

Advanced question (not relevant this year, but perhaps could be in the future); let's suppose the figures are slightly different and my income is £60k before my DC pension contributions, and £58k afterwards. Can I contribute £60k again or I am limited to £58k?

[Adamski]

A complicated area!!

The amount you contributed so far should include basic rate tax relief.

Employee contributions £2k
+ tax relief £0.5k
+ employer contributions £4k = £6.5k

The pension annual allowance is £60k

Assuming you earn more than this you're limited to the allowance.

60k - 6.5k = 53.5k

The employee contribution you can make is £42.8k.

[Ifnotnow8]

A friend (aged 69) who is semi-retired knows she can contribute £2880 (net) which is topped up to £3600 (gross) into her Sipp. She is on zero hour contract, and her PAYE income for 2023/2024 is going to be about £850.

Will she be able to add her earnings (£850) into her £2880 Sipp?

Thanks.

[globalarbtrader]

The amount you contributed so far should include basic rate tax relief.

I don't think that's right. The DC contributions are payroll deductions at source, not contributions out of taxed pay to a SIPP.

[globalarbtrader]

A friend (aged 69) who is semi-retired knows she can contribute £2880 (net) which is topped up to £3600 (gross) into her Sipp. She is on zero hour contract, and her PAYE income for 2023/2024 is going to be about £850.

Will she be able to add her earnings (£850) into her £2880 Sipp?

I don't think so, as that would mean they are contributing more than their earnings. AFAIK if you are earning less than £3600 you can contribute a maximum of £3600 (2880 before grossing up).

If they earned £3600 exactly in a given year, they'd still only be able to contribute that (or in fact £2880) to their pension. If they then earned an extra £850, they could contribute an additional 80% of £850 .