Pension headroom below the £60K allowance limit?

[Newroad]

Hi All.

Trying to understand the numbers here - would be grateful for any help. Examples given are approximate

The scenario is that there are three contributions to someone's pension, assume mine for discussion purposes, namely

1. Salary sacrifice to company pension: £1,100 per month
2. Employer contribution to company pension: £900 per month
3. Personal contribution to ii SIPP: £1000 per month

First question: Do I understand correctly that they count towards the £60K allowance limit as follows

1. £1,100 per month, so £13,200 per year
2. £900 per month, so £10,800 per year
3. £1000 per month, grossed up to £1,250 per month (as II reclaim basic rate tax), so £15,000 per year?

Giving a total of £39,000 per year, so £21,000 headroom below the £60,000 limit which could be contributed (excluding catch up from previous years which could/would increase the amount I could add further)?

Second question: If adding the further £21,000 to the II SIPP, I should actually only add £16,800 as that would get grossed up to £21,000 analogously to (3) above?

The reason I'm checking is that the three contributing sources above appear to have different tax implications, i.e.

1. Reduces tax at source, i.e. lowers taxable salary each month
2. Has no effect on tax
3. Reduces tax at assessment time, but only by the difference between higher rate and basic rate

which makes me nervous as to my understanding.

Thanks for any help in advance.

Regards, Newroad

[mearnsfool]

Couple of issues.

As you noted in (1), your original gross income is reduduced due to the salary sacrifice. That is only an issue if your old gross prior to sacrifise is very near to £60,000.

Assume in tax year 2023 2024 you had room to back pay say £20,000, after doing your calcs for that year and say £15,000 in tax year 2022 2023. Your final gross in 2024 2025 would have to be the original grosss less, the amount of the sacrifise, plus the 23 24 example say £20,000 plus the 22 23 example £15,000 plus you calculated amount for 21 22.

[Newroad]

Thanks, Mearnsfool.

The person's base salary is considerably above £60K, but you point (and check) is well made. I assume your subsequent paragraph was catering for the problem were it to exist?

May I further assume that other than the above, you think what I've said id broadly accurate?

Regards, Newroad

[londoninvestor]

The reason I'm checking is that the three contributing sources above appear to have different tax implications, i.e.

1. Reduces tax at source, i.e. lowers taxable salary each month
2. Has no effect on tax
3. Reduces tax at assessment time, but only by the difference between higher rate and basic rate

which makes me nervous as to my understanding.

This is basically correct, but in case 2, it's useful to ask the question "tax implications in comparison to what alternative scenario?"

A) If you compare case 2 to a situation where the employer doesn't make a contribution, but the person's salary is the same, then indeed the income tax paid is the same.

B) If on the other hand, you compare case 2 to a situation where the employer doesn't make a contribution, but the person's gross salary is £900pm higher, then less income tax is paid if the employer makes the pension contribution rather than paying the extra salary. (If the employee got the extra salary, they could get themself ultimately back into the same position by making a pension contribution which grossed up £10800 for the year.)

It's a matter of perspective, but maybe comparison B is more realistic. After all, employers don't make pension contributions as a charitable act - it's part of the package that attracts and retains you, and presumably the employer thinks that without the pension contribution they'd need to pay you more to keep you. Looked at in that light, perhaps the apparent gap between case 2 and cases 1/3 dissolves a bit?

[Newroad]

Hi LondonInvestor.

I think you're right looking top-down from a package perspective.

For practical purposes, the package is unlikely to change, so my interest is purely on the allowance angle.

Regards, Newroad