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max pension contribution - what is meant by "earnings"?

2boi
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max pension contribution - what is meant by "earnings"?

#434636

Postby 2boi » August 13th, 2021, 8:23 pm

I know the maximum I can contribute to a pension is my total of earnings in the tax year I contribute, up to a maximum of £40K (ignoring LTA which doesn't affect me). MPAA hasn't been triggered.

My question is if some of my earnings are from cashing in a Small Pot pension does that count as part of my total earnings? If so is it the whole Small Pot that counts or just the 75% taxable amount?

While I'm at it does unearned income count as earnings for this purpose? I mean interest, dividends etc.. I assume not given the name 'unearned income'.

Alaric
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Re: max pension contribution - what is meant by "earnings"?

#434637

Postby Alaric » August 13th, 2021, 8:25 pm

2boi wrote:
My question is if some of my earnings are from cashing in a Small Pot pension does that count as part of my total earnings?


Payments from pension schemes don't count.

ursaminortaur
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Re: max pension contribution - what is meant by "earnings"?

#434644

Postby ursaminortaur » August 13th, 2021, 9:05 pm

Alaric wrote:
2boi wrote:
My question is if some of my earnings are from cashing in a Small Pot pension does that count as part of my total earnings?


Payments from pension schemes don't count.


From the horse's mouth

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#earnings

Earnings that attract tax relief

Section 189(2)-(7) Finance Act 2004

For most people the amount of tax relief they can have on their pension contributions is limited to 100% of their relevant UK earnings that are chargeable to income tax for the tax year (there is another low limit for some - see Annual limits above). If relief is sought within the 100% limit an individual may want to establish how the various payments received as part of earnings have been taxed, to see what counts for this limit. The following earnings are examples of relevant UK earnings.

Relevant UK earnings means any one or more of the following types of income:

employment income, such as: pay, wages, bonus, overtime, or commission - but only if taxable under Section 7(2) Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) - so including:

the part of a redundancy payment above the £30,000 tax exempt threshold in section 403(1) ITEPA 2003. The first £30,000 of the redundancy payment is not classed as employment income so does not count here. But any amount on top of the £30,000 threshold is classed as employment income and so it is also relevant UK earnings. In making this analysis, care is required not to confuse usual wages or pay, pay in lieu of notice or holiday pay, with the redundancy payment when such elements are bundled into a final payment.
benefits in kind which are taxable (applies to employees earning over £8,500, and to directors)
profit related pay (including the part which is not taxable)
Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP) if paid by the employer and taxable under Section 7(2) ITEPA 2003
Permanent Health Insurance (PHI) payments paid by the employer whilst you are still in employment
pay paid by way of Government Securities
pay in the form of units in an authorised unit trust if taxed on the person receiving it
amounts taken off pay to buy partnership shares in a share incentive plan in line with paragraph 83 of Schedule 8 of Finance Act 2000

income from a trade, profession or vocation that is chargeable under Part 2 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)(applies if the activity is conducted individually or as a partner acting personally in a partnership)
income from a UK and/or EEA furnished holiday lettings business, which is chargeable under Part 3 ITTOIA 2005 (applies if the business is conducted individually, or as a partner acting personally in a partnership)

a UK furnished holiday lettings business means a UK property business so far as it consists of the commercial letting of furnished holiday accommodation (Chapter 6 Part 3 ITTOIA 2005).
an EEA furnished holiday lettings business means an overseas property business so far as it consists of the commercial letting of furnished holiday accommodation (Chapter 6 Part 3 ITTOIA 2005) in one or more EEA states.
in either case if there is a letting of accommodation only part of which is holiday accommodation, a just and reasonable apportionment is to be made to determine the amount of the income from that business that is to be counted.

patent income, where the individual alone or jointly devised the invention for which the patent in question is granted, in the following categories:

royalties or other sums paid regarding patent use and charged to tax under section 579 ITTOIA 2005 (intellectual property)
amounts on which tax is payable under section 587 ITTOIA 2005 (sales of patent rights) or section 593 ITTOIA 2005 (death of seller of patent rights), or
amounts on which tax is payable under section 472(5) of the Capital Allowances Act 2001 (balancing charge) or paragraph 100 of schedule 3 to that Act (balancing charges)

Relevant UK earnings are to be treated as not being chargeable to income tax if by virtue of section 2(1) Taxation (International and Other Provisions) Act 2010 (double taxation arrangements), they are not taxable in the United Kingdom. To the extent that they are not chargeable in this way, they will also not count towards the annual limit for relief explained in Annual limits above.

For the avoidance of doubt a pension is not classed as earnings and cannot be included in the definition of relevant UK earnings.


And just to add unearned income, ie interest and dividends, does not count as relevant earnings.
Last edited by ursaminortaur on August 13th, 2021, 9:11 pm, edited 1 time in total.

2boi
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Re: max pension contribution - what is meant by "earnings"?

#434677

Postby 2boi » August 14th, 2021, 2:54 am

Thanks that's very helpful.

It seems to be worse than I feared - does "limited to 100% of their relevant UK earnings that are chargeable to income tax" mean only earnings above the £12,570 tax allowance? I.e. if I earn £17,570 of which only £5K is taxable, is my maximum pension contribution really just £5K?

swill453
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Re: max pension contribution - what is meant by "earnings"?

#434679

Postby swill453 » August 14th, 2021, 3:44 am

2boi wrote:Thanks that's very helpful.

It seems to be worse than I feared - does "limited to 100% of their relevant UK earnings that are chargeable to income tax" mean only earnings above the £12,570 tax allowance? I.e. if I earn £17,570 of which only £5K is taxable, is my maximum pension contribution really just £5K?

No, it's the whole amount including the allowance.

Scott.

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Re: max pension contribution - what is meant by "earnings"?

#434743

Postby swill453 » August 14th, 2021, 12:58 pm

swill453 wrote:
2boi wrote:Thanks that's very helpful.

It seems to be worse than I feared - does "limited to 100% of their relevant UK earnings that are chargeable to income tax" mean only earnings above the £12,570 tax allowance? I.e. if I earn £17,570 of which only £5K is taxable, is my maximum pension contribution really just £5K?

No, it's the whole amount including the allowance.

Taking that to its extreme, you can earn exactly £12,570 in a year, pay no income tax at all, and still claim £2514 tax relief if you put £10,056 net into a pension.

Scott.

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Re: max pension contribution - what is meant by "earnings"?

#434838

Postby YeeWo » August 15th, 2021, 7:30 am

So, if I'm able to draw £20k+ per annum from a DB pension after 50 years old, I can still make contributions to a new DC scheme up-to £40k per annum until I finally decide to stop full time work? Thanks.

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Re: max pension contribution - what is meant by "earnings"?

#434906

Postby ursaminortaur » August 15th, 2021, 1:52 pm

YeeWo wrote:So, if I'm able to draw £20k+ per annum from a DB pension after 50 years old, I can still make contributions to a new DC scheme up-to £40k per annum until I finally decide to stop full time work? Thanks.


The normal minimum age to access a pension in the UK is currently 55 (which is planned to rise to 57 in 2028). Having said that there are some circumstances in which the right to take the pension at 50 was protected if they had had this right before A-day in 2006 (Taking it at 50 though can in some cases also mean that the LTA limit is reduced).

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/protected-early-pension-age/

Any member protecting their pension age under categories 2 and 3 above may have a reduced lifetime allowance.
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Where the reduction applies, the individual's lifetime allowance will be reduced by 2.5% for each complete year between the date the BCE occurs and the date the person reaches age 55. This reduced lifetime allowance is used to calculate whether any lifetime allowance charge is due, but in addition, it’s also used to calculate the pension commencement lump sum (as this is limited to 25% of the available lifetime allowance, in this case, the reduced lifetime allowance).


Taking a DB pension does NOT trigger the MPAA and hence you continue to have a £40k annual allowance and can contribute upto 100% of your relevant earnings within that allowance and even continue to make use of carry-forward if you have enough relevant earnings in the current year and unused allowances from previous years. As stated in previous posts though your income from pensions does NOT count as part of your relevant earnings.

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/money-purchase-annual-allowance-mpaa/

Avoiding the MPAA

Defined Benefit arrangements
If you receive a scheme pension from any defined benefit arrangement this will not trigger the MPAA.


Small Pots or defined benefits triviality payment
The small pots rules were amended following the announcement of pensions freedoms to allow three pots of up to £10,000 to be withdrawn from non-occupational DC pension funds, for occupational DC pension pots there is no limit on the number of small pots that can be taken. This is paid 25% tax free and 75% subject to marginal rate income tax in the same way as an UFPLS. However, a small pots payment does not trigger the MPAA.

PCLS, Nil-Income
Where a client has a need for capital but wishes to continue funding in future then PCLS can be paid with the balance being vested to drawdown. This will not trigger the MPAA until income is taken from the drawdown plan.
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Re: max pension contribution - what is meant by "earnings"?

#437214

Postby AWOL » August 24th, 2021, 10:46 pm

Does anyone know if taxable benefits count as earnings? e.g. carers allowance

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Re: max pension contribution - what is meant by "earnings"?

#437472

Postby 2boi » August 26th, 2021, 3:25 am

I don't think State benefits count as earnings which is a little unfair as many are taxable.

Have a look at
https://techzone.adviserzone.com/anon/public/pensions/Guide-Individuals-Contributions#anchor_2

The closest that does count seems to be "Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP) if paid by the employer and taxable". See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#earnings

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Re: max pension contribution - what is meant by "earnings"?

#437541

Postby ursaminortaur » August 26th, 2021, 10:41 am

2boi wrote:I don't think State benefits count as earnings which is a little unfair as many are taxable.

Have a look at
https://techzone.adviserzone.com/anon/public/pensions/Guide-Individuals-Contributions#anchor_2

The closest that does count seems to be "Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP) if paid by the employer and taxable". See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#earnings


No more unfair than pensions not counting as relevant earnings though they are taxable or for that matter taxable income from investments not being relevant earnings.

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Re: max pension contribution - what is meant by "earnings"?

#437591

Postby AWOL » August 26th, 2021, 2:58 pm

ursaminortaur wrote:
2boi wrote:I don't think State benefits count as earnings which is a little unfair as many are taxable.

Have a look at
https://techzone.adviserzone.com/anon/public/pensions/Guide-Individuals-Contributions#anchor_2

The closest that does count seems to be "Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP) if paid by the employer and taxable". See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#earnings


No more unfair than pensions not counting as relevant earnings though they are taxable or for that matter taxable income from investments not being relevant earnings.



I think pensions are a little different in that it would create circular logic that the more you take from a pension the more you can put in. Ultimately I am not sure the current system is wrong. It would be interesting to know the reasoning behind this aspect of the rules.

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Re: max pension contribution - what is meant by "earnings"?

#437593

Postby JohnB » August 26th, 2021, 3:02 pm

Earnings are what you "earn" by doing work. Benefits are what you are entitled to from the state for being worthy of help. Dividends are ...

The current boundaries seem very sensible to me.


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