Two pension contribution examples
Discussion
I've been digging through this to try and learn about how Relevant Earnings and Pension Input Amounts collide with the Annual Allowance. Have I got it straight?
Person A earns £25k gross in 2019/20
They would expect to pay EE NIC and some PAYE at the basic rate
They use Salary Sacrifice to direct 50% of their gross into an occupational scheme
PAYE income tax for the year is therefore reduced to NIL (taxable income = the personal allowance of £12,500)
Their Pension Input Amount (“PIA”) for the year will be…
£12,500 direct (the 50% employee contribution)
£750 employer contribution (assume 3% on £25k with no NIC benefit passed on)
£187.50 of tax relief at source (automatically appears in the pension account based on the £750 employer contribution, grossed-up by 25%)
i.e. £13,437.50 sub total
At this point, they have paid NIL income tax through PAYE, they have also benefitted from £187.50 of ‘automatic’ basic rate tax relief in their occupational pension scheme account…
Is their Relevant Income now £12,500 i.e. the original £50k Gross Salary less the £12,500 sacrificed?
Would that person technically be exposed to a small income tax liability because their PIA (i.e. £13,437.50 as per the above) is over their Relevant Income (their post-sacrifice, ‘taxable’ gross salary)?
Person B earns £60k gross in 2019/20
They would expect to pay EE NIC, some PAYE at the basic rate and the higher rate on the last £10k
They use Salary Sacrifice to direct 25% of their gross into an occupational scheme
PAYE income tax for the year is therefore based on a taxable gross salary of £45k (i.e. some PAYE income tax will be deducted, but none at the higher rate)
Their Pension Input Amount (“PIA”) for the year will be…
£15,000 direct (the 25% employee contribution)
£1,800 employer contribution (assume 3% on £60k with no NIC benefit passed on)
£450 of tax relief at source (automatically appears in the pension account based on the £1,800 employer contribution, grossed-up by 25%)
i.e. £17,250 sub total
At this point, they have paid some income tax through PAYE, they have also benefitted from £450 of ‘automatic’ basic rate tax relief in their occupational pension scheme account…
Is their Relevant Income now £45,000 i.e. the original £60k Gross Salary less the £15,000 sacrificed?
If so, would they have ‘headroom’ of £22,750 (based on a £40,000 Annual Allowance less the £17,250 PIA as above) if they were able to fund an additional contribution into their SIPP (Nb. £22,750 being £18,200 in cash plus £4,550 of automatic tax relief added in the SIPP)?
Plus… the possibility that an extra £4k in cash (+ £1k of automatic tax relief) could be paid into the SIPP taking the total 2019-20 PIA up to £45k (i.e. the tax efficiency ceiling, where the current year PIA = current year Relevant Income, as above on the assumption that there was £5k worth of unused Annual Allowance available to carry forward)?
Person A earns £25k gross in 2019/20
They would expect to pay EE NIC and some PAYE at the basic rate
They use Salary Sacrifice to direct 50% of their gross into an occupational scheme
PAYE income tax for the year is therefore reduced to NIL (taxable income = the personal allowance of £12,500)
Their Pension Input Amount (“PIA”) for the year will be…
£12,500 direct (the 50% employee contribution)
£750 employer contribution (assume 3% on £25k with no NIC benefit passed on)
£187.50 of tax relief at source (automatically appears in the pension account based on the £750 employer contribution, grossed-up by 25%)
i.e. £13,437.50 sub total
At this point, they have paid NIL income tax through PAYE, they have also benefitted from £187.50 of ‘automatic’ basic rate tax relief in their occupational pension scheme account…
Is their Relevant Income now £12,500 i.e. the original £50k Gross Salary less the £12,500 sacrificed?
Would that person technically be exposed to a small income tax liability because their PIA (i.e. £13,437.50 as per the above) is over their Relevant Income (their post-sacrifice, ‘taxable’ gross salary)?
Person B earns £60k gross in 2019/20
They would expect to pay EE NIC, some PAYE at the basic rate and the higher rate on the last £10k
They use Salary Sacrifice to direct 25% of their gross into an occupational scheme
PAYE income tax for the year is therefore based on a taxable gross salary of £45k (i.e. some PAYE income tax will be deducted, but none at the higher rate)
Their Pension Input Amount (“PIA”) for the year will be…
£15,000 direct (the 25% employee contribution)
£1,800 employer contribution (assume 3% on £60k with no NIC benefit passed on)
£450 of tax relief at source (automatically appears in the pension account based on the £1,800 employer contribution, grossed-up by 25%)
i.e. £17,250 sub total
At this point, they have paid some income tax through PAYE, they have also benefitted from £450 of ‘automatic’ basic rate tax relief in their occupational pension scheme account…
Is their Relevant Income now £45,000 i.e. the original £60k Gross Salary less the £15,000 sacrificed?
If so, would they have ‘headroom’ of £22,750 (based on a £40,000 Annual Allowance less the £17,250 PIA as above) if they were able to fund an additional contribution into their SIPP (Nb. £22,750 being £18,200 in cash plus £4,550 of automatic tax relief added in the SIPP)?
Plus… the possibility that an extra £4k in cash (+ £1k of automatic tax relief) could be paid into the SIPP taking the total 2019-20 PIA up to £45k (i.e. the tax efficiency ceiling, where the current year PIA = current year Relevant Income, as above on the assumption that there was £5k worth of unused Annual Allowance available to carry forward)?
Gassing Station | Finance | Top of Page | What's New | My Stuff