Paying over the £60k allowance into DC Pension
Discussion
I've already used up my 3 years of c/f pension allowance. But if I continue to pay at the current level, I will exceed the £60k allowance for this year. My payments are made as salary sacrifice into a DC scheme.
Looking at the impact of exceeding the allowance - from what I can see it just means any excess over the £60k will simply need to be added to my tax return and I'll pay tax on it at my marginal rate.
So am I right in thinking that's still well worth doing, as I am still saving on NI contributions? (And benefitting from the e'ers NI savings too, as they share those with us 50:50).
Not sure whether to faff about asking HR to reduce my % to force my numbers to go under the £60k level.
Looking at the impact of exceeding the allowance - from what I can see it just means any excess over the £60k will simply need to be added to my tax return and I'll pay tax on it at my marginal rate.
So am I right in thinking that's still well worth doing, as I am still saving on NI contributions? (And benefitting from the e'ers NI savings too, as they share those with us 50:50).
Not sure whether to faff about asking HR to reduce my % to force my numbers to go under the £60k level.
https://www.gov.uk/tax-on-your-private-pension/ann...
If it's going in as salary sacrifice with no employer top up and the only saving is NI and it's being taxed on the way in then personally I'd be trying to adjust and stay below 60k.
Edited by scot_aln on Tuesday 17th June 17:20
It's not just a question of income tax relief on the contributions. You simply aren't allowed to put "too much" into pension and then benefit from tax free cumulation. That tax free cumulation is massively valuable over a period of years/decades.
If you ever "accidentally" put too much into pension (or ISA) the only way forward is to inform the provider who will refund the over-contribution.
Depending on the type of pension the big risk with over-contribution is potentially having HMRC kick the whole arrangement out of the tax-advantaged regime, which could be very uncomfortable indeed.
If you ever "accidentally" put too much into pension (or ISA) the only way forward is to inform the provider who will refund the over-contribution.
Depending on the type of pension the big risk with over-contribution is potentially having HMRC kick the whole arrangement out of the tax-advantaged regime, which could be very uncomfortable indeed.
Panamax said:
It's not just a question of income tax relief on the contributions. You simply aren't allowed to put "too much" into pension and then benefit from tax free cumulation. That tax free cumulation is massively valuable over a period of years/decades.
If you ever "accidentally" put too much into pension (or ISA) the only way forward is to inform the provider who will refund the over-contribution.
Depending on the type of pension the big risk with over-contribution is potentially having HMRC kick the whole arrangement out of the tax-advantaged regime, which could be very uncomfortable indeed.
Hi Panamax. What you've said doesn't tie in to what the HMRC website seems to say.If you ever "accidentally" put too much into pension (or ISA) the only way forward is to inform the provider who will refund the over-contribution.
Depending on the type of pension the big risk with over-contribution is potentially having HMRC kick the whole arrangement out of the tax-advantaged regime, which could be very uncomfortable indeed.
According to their website "Your annual allowance is the most you can save in your pension pots in a tax year (6 April to 5 April) before you have to pay tax.
You’ll only pay tax if you go above the annual allowance. This is £60,000 this tax year."
It goes on to say "If you go over your annual allowance, either you or your pension provider must pay the tax.
Fill in the ‘Pension savings tax charges’ section of a Self Assessment tax return to tell HMRC about the tax, even if your pension provider pays all or part of it."
I was just starting my tax return and it does indeed seem to be a simple case of filling in a box with the amount over the £60k, and I'll just have to pay tax at my marginal rate on this figure. So I'm back to my original question - asking if i'm right in saying I may as well not worry if I go over £60k, as the impact is simply that I'll be taxed what I would have been anyway if I'd had it as income instead of sacrificing it straight into my pension? And in fact I'll still be better off by doing this as I won't have had to pay the NI on it?
UpTheIron said:
It was still be taxed on the way out as well.
Aha, OK. So although the value of the amount over £60k going into the pension is no worse than if I'd taken it as income instead, the bit where I fall down is that when i take it out of the pension I'll get taxed again. Whereas if I'd just taken it as income and put it in the bank, I would only get taxed on its growth, not the capital?fwiw, HMRC have a dedicated unit to go after people who they suspect have paid in over the limit, based on info from pension providers. I've been dealing with them for 18 months, and it's not easy and it's not fun. Like having to provide documentary evidence that I didn't pay into other pensions (go figure...) within 14 days
Smidge001 said:
Aha, OK. So although the value of the amount over £60k going into the pension is no worse than if I'd taken it as income instead, the bit where I fall down is that when i take it out of the pension I'll get taxed again. Whereas if I'd just taken it as income and put it in the bank, I would only get taxed on its growth, not the capital?
You could consider whether the tax free compound growth of the pension between now and drawdown is worth more to you than the tax you pay when you draw the funds out.
. Not employee/employer NI. Reeves will probably change that pretty soon(for all contributions) relating to Salary sacrifice schemes. Panamax said:
Smidge001 said:
Hi Panamax. What you've said doesn't tie in to what the HMRC website seems to say.
In which case, I suggest you get some paid advice.If you plan on being a lower band tax payer when you take your pension there could still be an advantage in doing this.
Smidge001 said:
Panamax said:
It's not just a question of income tax relief on the contributions. You simply aren't allowed to put "too much" into pension and then benefit from tax free cumulation. That tax free cumulation is massively valuable over a period of years/decades.
If you ever "accidentally" put too much into pension (or ISA) the only way forward is to inform the provider who will refund the over-contribution.
Depending on the type of pension the big risk with over-contribution is potentially having HMRC kick the whole arrangement out of the tax-advantaged regime, which could be very uncomfortable indeed.
Hi Panamax. What you've said doesn't tie in to what the HMRC website seems to say.If you ever "accidentally" put too much into pension (or ISA) the only way forward is to inform the provider who will refund the over-contribution.
Depending on the type of pension the big risk with over-contribution is potentially having HMRC kick the whole arrangement out of the tax-advantaged regime, which could be very uncomfortable indeed.
According to their website "Your annual allowance is the most you can save in your pension pots in a tax year (6 April to 5 April) before you have to pay tax.
You ll only pay tax if you go above the annual allowance. This is £60,000 this tax year."
It goes on to say "If you go over your annual allowance, either you or your pension provider must pay the tax.
Fill in the Pension savings tax charges section of a Self Assessment tax return to tell HMRC about the tax, even if your pension provider pays all or part of it."
I was just starting my tax return and it does indeed seem to be a simple case of filling in a box with the amount over the £60k, and I'll just have to pay tax at my marginal rate on this figure. So I'm back to my original question - asking if i'm right in saying I may as well not worry if I go over £60k, as the impact is simply that I'll be taxed what I would have been anyway if I'd had it as income instead of sacrificing it straight into my pension? And in fact I'll still be better off by doing this as I won't have had to pay the NI on it?
Get some proper advice - it isn't just a case of bung everything you can into a pension being 100% the best idea. It sounds like you're talking about significant sums of money.
There are two disadvantages to a pension:
You pay tax when you access it (with some caveats)
You can't access the money until you reach a certain age.
If you're not getting tax relief on the money on the way into your pension, then the first place to look is an investment that's tax free on the way out. E.g. A stocks and shares ISA. You can invest in exactly the same funds as you do with your pension (provider dependent) and the growth is all tax free. Additionally, you can access this money whenever you want.
If you've already maxed out your ISA contributions for this year and you've put £60K into your pension, then I'd look to be taking the hit, paying the income tax and spending some money today, on having fun today. Alternatively, you could look at other investments that allow you to use your CGT allowance each year, but I know nothing about how to go about that.
There are two disadvantages to a pension:
You pay tax when you access it (with some caveats)
You can't access the money until you reach a certain age.
If you're not getting tax relief on the money on the way into your pension, then the first place to look is an investment that's tax free on the way out. E.g. A stocks and shares ISA. You can invest in exactly the same funds as you do with your pension (provider dependent) and the growth is all tax free. Additionally, you can access this money whenever you want.
If you've already maxed out your ISA contributions for this year and you've put £60K into your pension, then I'd look to be taking the hit, paying the income tax and spending some money today, on having fun today. Alternatively, you could look at other investments that allow you to use your CGT allowance each year, but I know nothing about how to go about that.
Olivera said:
Perhaps it goes with out saying, but the 60k annual allowance is a gross amount, i.e. you can only 'pay in' 48k, which equals 60k with basic rate tax relief.
Thread deviation but am I right in thinking that if you wanted to max your 60k contribution using only for example a SIPP then regardless of what level of tax you paid (assuming you earned a minimum of 75k so you had enough earnings) then you would pay in 48k and as a higher rate taxpayer then the SIPP would claim the basic (12k) to top it up to 60k and then you'd do a tax return to claim the rest back?Olivera said:
Perhaps it goes with out saying, but the 60k annual allowance is a gross amount, i.e. you can only 'pay in' 48k, which equals 60k with basic rate tax relief.
If you're doing the calculations assuming salary sacrifice, you'd need to sacrifice 60K not 48k, as you're dealing with pre-tax figures.Just want to thank several people for their subsequent responses to my questions (eg Darlo, PeteTaylor etc) – I have been reading them, but every time I did it was out of the allowed hours for newbies to post so I couldn’t reply at the time! V frustrating as I’m sure I’ve been here longer than the required 2 weeks….
Anyway, point I’m taking away is that I will indeed have to declare on my tax return and pay tax at my marginal rate, but I’m right in thinking that at least I’ve saved the NI. However, probably not a strategy to be taking intentionally - And to be clear, this isn’t something I’ve done on purpose (certainly now I’ve been reminded about being taxed on the way out… though as Twig has mentioned, I can still draw the first £12k or so tax free). It’s just that the company I work for require % of salary for deductions, rather than a set £ amount, and as a result of me ending up with more salary than I’d planned (last year because my part time hours got increased for a few months, and then this year because I had an agreed leaving date which has just been pushed out by 3 months) so I have gone over by accident.
As a result of this discussion, and once I get my revised leaving date firmed up, I’ll speak to my employer, and request a reduction to my salary sacrifice %. Thanks!
Anyway, point I’m taking away is that I will indeed have to declare on my tax return and pay tax at my marginal rate, but I’m right in thinking that at least I’ve saved the NI. However, probably not a strategy to be taking intentionally - And to be clear, this isn’t something I’ve done on purpose (certainly now I’ve been reminded about being taxed on the way out… though as Twig has mentioned, I can still draw the first £12k or so tax free). It’s just that the company I work for require % of salary for deductions, rather than a set £ amount, and as a result of me ending up with more salary than I’d planned (last year because my part time hours got increased for a few months, and then this year because I had an agreed leaving date which has just been pushed out by 3 months) so I have gone over by accident.
As a result of this discussion, and once I get my revised leaving date firmed up, I’ll speak to my employer, and request a reduction to my salary sacrifice %. Thanks!
xeny said:
Olivera said:
Perhaps it goes with out saying, but the 60k annual allowance is a gross amount, i.e. you can only 'pay in' 48k, which equals 60k with basic rate tax relief.
If you're doing the calculations assuming salary sacrifice, you'd need to sacrifice 60K not 48k, as you're dealing with pre-tax figures.
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