Additional pension purchase tax relief

[rfisher]

I've asked this question before but not had a clear answer so I'm trying again.

If it doesn't work this time I'll pay someone (probably Eric) for an answer.

Figures may or may not be fictitious.

I can buy an additional £5000 per annum pension from my occupational pension provider (DB) for £100,000.

This would not exceed my annual allowance of £120,000 for the last 3 years, so I wouldn't pay tax on top of the £100,000.

What I don't know is how much tax relief I could claim.

Let's say that my taxable pay in the tax year that I make the additional pension purchase is £80,000.

What does that give me as a figure for tax relief in the £100,000?

Ta.

[PJ RS]

As far as I know, if the 100k is a one off contribution then you can only claim tax relief up to your earnings in that tax year (ie £80k assuming no annual allowance issues).

Looking at an online pension tax relief calculator, this means, for 2017/18, a £100k gross pension contribution would cost you £77k (ie you would get a tax relief of £23k if making the contribution from post tax income).

You might want to try and split the payment over two tax years (or try to buy £4k of pension for 80k) and then 1k of pension next tax year for 20k (if the scheme allows it).

Hope this helps.

[rfisher]

Thanks.

I think £100,000 is considered to be net of tax so attracts a maximum of £25,000 tax relief at 20% if my earnings allow this much.

It now gets confusing, as I think that I would only be able to claim the 20% on the proportion of my taxable earnings that I pay 40% on.

Am I getting the hang of this?

[williaa68]

if the figures are anywhere approaching accurate (100k for 5k) then one would worry about the solvency of the scheme - that's way above market unless you are very old or an impaired life. Of course you may be able to contribute and then take a transfer value but be careful - if it looks too good to be true etc...

[rfisher]

Yes - I think it's a good deal even without getting all the tax relief, which is why I'm giving it some serious consideration.

I expect drainpipe will be along soon to suggest that I buy a load of flats instead.

[PurpleMoonlight]

As PJ RS stated, tax relief is limited to the tax you pay in the tax year the contribution is made.

Contributions to a defined benefit arrangement are normally deducted from gross pay. Are you sure the £100,000 is to be treated as a net contribution? If so, they would be reclaiming £25,000.

[sidicks]

williaa68 said:

if the figures are anywhere approaching accurate (100k for 5k) then one would worry about the solvency of the scheme - that's way above market unless you are very old or an impaired life. Of course you may be able to contribute and then take a transfer value but be careful - if it looks too good to be true etc...

For a joint-life (50% spouse's pension), non inflation-linked scheme @ age 65, £5k for £100k would be entirely consistent with normal market rates.

Why do you think otherwise, where are you getting your information from? A quick google search came up wth this, as an example:
http://www.sharingpensions.co.uk/annuity_rates.htm

[rfisher]

PurpleMoonlight said:

As PJ RS stated, tax relief is limited to the tax you pay in the tax year the contribution is made.

Contributions to a defined benefit arrangement are normally deducted from gross pay. Are you sure the £100,000 is to be treated as a net contribution? If so, they would be reclaiming £25,000.

This would be an additional pension purchase, paid by lump sum.

You can pay in instalments but it costs more.

You can also pay via your salary pre-tax.

So is it correct that I could claim up to £25,000 tax relief, but only from my 40% taxed earnings?

[PurpleMoonlight]

rfisher said:

This would be an additional pension purchase, paid by lump sum.

You can pay in instalments but it costs more.

You can also pay via your salary pre-tax.

So is it correct that I could claim up to £25,000 tax relief, but only from my 40% taxed earnings?

Is the £100,000 deemed by the pension provider a 'gross' contribution (they will not reclaim any tax) or a 'net' contribution (they will reclaim £25,000)?

[rfisher]

PurpleMoonlight said:

Is the £100,000 deemed by the pension provider a 'gross' contribution (they will not reclaim any tax) or a 'net' contribution (they will reclaim £25,000)?

I'll have to ask.

[PurpleMoonlight]

rfisher said:

I'll have to ask.

Okay.

If it's gross, you will obtain tax relief via your tax return. The tax you will have paid on your salary will be £20,700 so that is all the tax relief you will get. It will be paid direct to you.

If it's net, £25,000 tax relief will be reclaimed by the pension provider. But you are only entitled to tax relief of £20,700. I'm afraid I don't know what HMRC do in these circumstances, hopefully just as simple as asking you to repay the £4,300 tax relief you were not entitled to.

It would be more tax efficient to spread the cost over two tax years.