No tax allowance on pension (Tapered relief)

[Wilmslowboy]

I am not getting tax relief on my pension contributions, had to pay it back to HMRC (tax year ‘21/‘22), same will apply this year, all due to tapered allowance.

I’m still contributing, in part as it’s savings and also it’s free money from my employer.

Unfortunately I can’t quite get my head around if actually I’ll be taxed twice on this money , on the way in (paying back tax relief each year as part of my self assessment), and then when I finally come to withdraw (draw down) money from my pension in 10 or so years time.


Apologises if I’m being thick.

[steve_n]

25% will be tax free up to your lifetime allowance and the rest is subject to income tax on the way out. If you are over the LTA then there's no tax free part on the excess and you pay a 25% LTA tax charge on the excess plus income tax, or take the excess as a lump sum with a 55% tax charge.

[Gargamel]

steve_n said:

25% will be tax free up to your lifetime allowance and the rest is subject to income tax on the way out. If you are over the LTA then there's no tax free part on the excess and you pay a 25% LTA tax charge on the excess plus income tax, or take the excess as a lump sum with a 55% tax charge.

I think they will come for the 25% relief before long.

[Wilmslowboy]

steve_n said:

25% will be tax free up to your lifetime allowance and the rest is subject to income tax on the way out. If you are over the LTA then there's no tax free part on the excess and you pay a 25% LTA tax charge on the excess plus income tax, or take the excess as a lump sum with a 55% tax charge.

Apologies I'm really struggling to get my head around this
(Setting aside the 25% tax-free lump sum, and the LTA)

If I used to pop in £20k (combination of employer and I) and paid zero tax on this (due to the allowance) - this would have saved me £9,000 in TAX (45%)
but when I took the money out in years to come, I would pay tax at that marginal rate (let's say 40%)

Year 1 - £20k goes in (No tax)
Year 10 - £20k comes out (£8k to the tax man)
Total Tax burden - £4k (in 10 years' time)


Now is it a case of
Year 1 - £20k goes in (£9,500 to the tax man)
Year 10 - £20k comes out (£4k to the tax man)
Total Tax burden - £17,500 (majority in the year)

Edited by Wilmslowboy on Wednesday 8th February 12:56

[BatForcePC]

Wilmslowboy said:

Now is it a case of
Year 1 - £20k goes in (£9,500 to the tax man)
Year 10 - £20k comes out (£4k to the tax man)
Total Tax burden - £17,500 (majority in the year)

Is the £17.5 correct? 9.5 + 4 = 13.5k..

Anyway, I am in the same position having put money in through the year, only to find my earnings for the year taper my £40k allowance to £4k. Your case above is right, although you're forgetting the £4k you can put in with relief (if it's not SS). So I think the £9.5k would be £7.2k and a total tax burden of £11.5k on a £20k contribution and withdrawal. You're also assuming the marginal rate is 40%, if the fiscal drag strategy ends and tax bands move, you may be able to stay within the 20% range when you hit retirement.

In case it's of interest, I'm now only putting £4k into my pension but my company will pay the % they would normally put into my pension as salary, so I'm now shoving that into a S&S ISA - to avoid tax on withdrawals - I can't avoid the tax and NI on my salary but at least it will be tax free when I withdraw..assuming they don't mess with ISA's which knowing this bunch isn't off the table!

[Wilmslowboy]

BatForcePC said:

Is the £17.5 correct? 9.5 + 4 = 13.5k..

Anyway, I am in the same position having put money in through the year, only to find my earnings for the year taper my £40k allowance to £4k. Your case above is right, although you're forgetting the £4k you can put in with relief (if it's not SS). So I think the £9.5k would be £7.2k and a total tax burden of £11.5k on a £20k contribution and withdrawal. You're also assuming the marginal rate is 40%, if the fiscal drag strategy ends and tax bands move, you may be able to stay within the 20% range when you hit retirement.

In case it's of interest, I'm now only putting £4k into my pension but my company will pay the % they would normally put into my pension as salary, so I'm now shoving that into a S&S ISA - to avoid tax on withdrawals - I can't avoid the tax and NI on my salary but at least it will be tax free when I withdraw..assuming they don't mess with ISA's which knowing this bunch isn't off the table!

Corrected should read +£8k (40% of £20K)

Yep tax rate could be 20% or 40% in 10 years' time...however the principal amount I put in which will already be net of tax, is still getting taxed again when I take it out ?

If my thinking is right saving for a pension has gone from being materially better than sticking it in a stand-alone tracker fund etc to materially worse, at least with a stand-alone tracker fund I have access my money anytime and only the gain is taxed not the principle put it.

I must have this wrong ?

[BatForcePC]

The tax relief or SS schemes mean for most people there is no tax when paid into a pension, it is however taxed when you take it out as per tax bands etc...

Personally it makes no sense for me to contribute more than £4k into a pension when I hit 100% taper because my company will pay their contribution as salary. If your company won't then you need to weigh up the "free" contribution from your company versus the potential tax at both ends of the equation.

[Wilmslowboy]

BatForcePC said:

The tax relief or SS schemes mean for most people there is no tax when paid into a pension, it is however taxed when you take it out as per tax bands etc...

Personally it makes no sense for me to contribute more than £4k into a pension when I hit 100% taper because my company will pay their contribution as salary. If your company won't then you need to weigh up the "free" contribution from your company versus the potential tax at both ends of the equation.

Thanks - Good point if the employer is happy to pay the pension contributions as salary.

[deja.vu]

Wilmslowboy said:

BatForcePC said:

The tax relief or SS schemes mean for most people there is no tax when paid into a pension, it is however taxed when you take it out as per tax bands etc...

Personally it makes no sense for me to contribute more than £4k into a pension when I hit 100% taper because my company will pay their contribution as salary. If your company won't then you need to weigh up the "free" contribution from your company versus the potential tax at both ends of the equation.

Thanks - Good point if the employer is happy to pay the pension contributions as salary.

Mine pays nothing, I guess it’s viewed as a nice problem to have.
I pay in the minimum possible and keep it as close to 4k as I can.

[Panamax]

What is "tapered allowance"? Are people talking about the 60% effective tax band from £100k to £125k?

How does it affect pension contributions? I suppose "taxable income" remains at, say, £110k so £10k of pension contributions would get 40% tax relief but £5k of personal allowance would be lost. What rate of tax is paid on that lost allowance - presumably 40% and not the effective 60%, so 20% better off.

And it seems wrong to look at "money in" and "money out" in simplistic cash terms. During the years of investment you'd be getting,

• tax free compound investment returns on the net cost of your contributions,

AND

• tax free compound returns on investments that never actually cost you anything at all - i.e. investment returns on the tax relief.

What's not to like?

[WhiskyDisco]

Tapered allowance is the reduction of tax-free allowance into your pension when you earn over a certain amount. Essentially you can't use a pension as a tax-free wrapper after a certain salary.

[bogie]

Panamax said:

What is "tapered allowance"? Are people talking about the 60% effective tax band from £100k to £125k?

How does it affect pension contributions? I suppose "taxable income" remains at, say, £110k so £10k of pension contributions would get 40% tax relief but £5k of personal allowance would be lost. What rate of tax is paid on that lost allowance - presumably 40% and not the effective 60%, so 20% better off.

And it seems wrong to look at "money in" and "money out" in simplistic cash terms. During the years of investment you'd be getting,

• tax free compound investment returns on the net cost of your contributions,

AND

• tax free compound returns on investments that never actually cost you anything at all - i.e. investment returns on the tax relief.

What's not to like?

Nope ...its different, start worrying about pension tapering from £200k upwards

https://www.moneyhelper.org.uk/en/pensions-and-ret...

[Panamax]

bogie said:

Nope ...its different, start worrying about pension tapering from £200k upwards

Ok, thanks. In that case it's a "problem" I don't need to research!

[brickwall]

As above, the simplest thing to do is see if your employer will pay £4k into pension and then the rest as salary.