Question re. Wife's Pension Contributions

[lmnfl]

Hello.
This is my first post on this forum so apologies if I have posted this in the wrong place.
I have a query re. my wife's pension contributions for the current tax year.
She was employed from April 2021-August 2021 (inclusive) as a Teacher and had a Total Taxable Pay to Date of £17,604.
The Tax Paid to Date is £2455.
During this employment, she contributed £1945 to TPS; The Employer Pension to Date is £4515.
She has since then contributed £16,000 into a SIPP, to which a £4,000 tax relief has been added.

My questions are:
1] Are her relevant earnings to date £17,604 or £19,549 (17604 + 1945)?
2] Is her personal pension contribution to date £21,945 (16000 + 4000 + 1945) or some other figure?
2] Is the additional allowance available to her for the current year £13,540 (40000 -4515 -1945-16000 -4000) or some other number?
3] She will be working from October 2021 in our Ltd Co. Can the Ltd Co. make further contributions into her SIPP up to the limit of £40,000 regardless of her monthly salary?

Many thanks for any suggestions or thoughts you may have.
With gratitude.

[ursaminortaur]

Hello.
This is my first post on this forum so apologies if I have posted this in the wrong place.
I have a query re. my wife's pension contributions for the current tax year.
She was employed from April 2021-August 2021 (inclusive) as a Teacher and had a Total Taxable Pay to Date of £17,604.
The Tax Paid to Date is £2455.
During this employment, she contributed £1945 to TPS; The Employer Pension to Date is £4515.
She has since then contributed £16,000 into a SIPP, to which a £4,000 tax relief has been added.

My questions are:
1] Are her relevant earnings to date £17,604 or £19,549 (17604 + 1945)?

I believe the TPS is a net pay scheme so the employer deducts the gross pension contributions. Hence I think her relevant earnings would be £19549.

2] Is her personal pension contribution to date £21,945 (16000 + 4000 + 1945) or some other figure?
2] Is the additional allowance available to her for the current year £13,540 (40000 -4515 -1945-16000 -4000) or some other number?

The TPS is a DB scheme the latest version being a career average scheme accruing at a rate of 1/57th of pensionable salary. Those who joined earlier may still be in the final salary scheme or may have switched to the new career average scheme but still have benefits accrued under the older final salary scheme.

https://www.teacherspensions.co.uk/members/new-starter/what-is-a-teachers-pension.aspx

It’s a Defined Benefit Scheme, registered with HM Revenue and Customs, based on your salary and service rather than investments – so there’ll be no nasty surprises when you come to claim your pension
Your pension will be a regular source of income when you retire – but you can also take some of it as a tax-free lump sum
You’ll join the career average arrangement and accrue benefits each year based on 1/57th of your pensionable salary including overtime.

The annual allowance calculation for a DB scheme is rather more complicated than that for a DC scheme. With a DC scheme it is just what has been contributed but that isn't the case for a DB scheme with the value of the equivalent pot being based on the accrual rate, number of years and days of accrual and pensionable salary. The pensionable salary could be the same as the gross annual salary but depending on the scheme may include other things such as bonuses or in some cases could be less than the gross annual salary. The annual allowance used up is basically the difference between the value at the end of the previous year (uprated by CPI) and that at the end of the current year multiplied by 16.

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

For increases to the pension rights under a DB scheme a 16:1 valuation factor is used (the factor was 10:1 prior to 6 April 2011). When calculating the pension to value, no actuarial reduction factor is to be applied, nor is the member to be treated as though in ill health.

What happens is the opening value of rights, (uprated by CPI each September), is subtracted from the closing value of rights. The difference is the pension input amount. The CPI measure used is the measure for the year to September in the tax year immediately preceding the tax year the pension input period ends. eg. for the 2018/19 tax year the CPI figure from September 2017 is used.
Example 1: calculation for a Defined Benefit pension input amount

The assumed basis for calculating a defined benefit pension input amount in this example is a 1/60th accrual scheme, and CPI of 3%

15 years’ service
£75,000 pensionable earnings; increasing to £78,000
Inflation 3%
Money purchase AVC contributions £4,680

Step 1 – ‘Opening Value’:

(15/60 x £75,000) x 16

= £18,750 x 16

= £300,000

Step 2 – Increase ‘opening value’ by inflation:

£300,000 x (1 + 3%)

= £309,000

Step 3 – ‘Closing Value’:

(16/60 x £78,000) x 16

= £20,800 x 16

= £332,800

Step 4 – DB ‘Pension Input Amount’:

Closing Value – Opening Value

= £332,800 - £309,000

= £23,800

Step 5 – Add money purchase contributions:

£23,800 + £4,680

= £28,480

Total pension input amount = £28,480

As you can see this is quite complicated. The above example was for a final salary scheme for a career average scheme it is even more complicated since you can't just simply work out the opening value by multiplying the accrual rate by the number of years by the salary for the previous year but have to know all the previous years salaries and how much they were uprated by inflation (or preferably have the figure provided by your employer).

However in your case from the figures provided we can probably short cut this by assuming that the initial value was zero and just looking at the few months worked.


The annual allowance used up would then be

16 x (percentage of year worked x pensionable salary x accrual rate)

The accrual rate is 1/57 and the (percentage of year worked x pensionable salary) assuming that the pensionable salary for the year would be equal to the relevant earnings for a year would be equal to the relevant earnings to date.

Hence the annual allowance used up so far by the TPS would be 16 x £19,549 x 1/57 = £5487.44
Thus the total annual allowance used up so far would be £5487.44 + £16,000 + £4,000 = £25,487.44

The remaining allowance would thus appear to be £40,000 - £25,487.44 = £14,512.56

Note however this is an estimate since it is using a short cut and making assumptions about pensionable pay. Hence when making additional contributions it might make sense to err on the cautious side.

It also worth noting that you need two years of contributions to the TPS to get any benefits so unless your wife has previously been a member or intends to return to teaching in the future she may wish to get a refund of her contributions which would obviously make these calculations irrelevant.

3] She will be working from October 2021 in our Ltd Co. Can the Ltd Co. make further contributions into her SIPP up to the limit of £40,000 regardless of her monthly salary?

To do that they would obviously need to pay her enough so that her total gross relevant earnings for the year was at least £40,000 ie in the months remaining they would need to pay her at least £40,000 - £19,549 = £20,451.

I hope that is of some help.

[lmnfl]

3] She will be working from October 2021 in our Ltd Co. Can the Ltd Co. make further contributions into her SIPP up to the limit of £40,000 regardless of her monthly salary?

To do that they would obviously need to pay her enough so that her total gross relevant earnings for the year was at least £40,000 ie in the months remaining they would need to pay her at least £40,000 - £19,549 = £20,451.

I hope that is of some help.

Thank you so much @ursaminortaur for a very helpful response (particularly for the detailed calculations behind the TPS). I was not aware of the complexity behind DB schemes.
Re. your final comment (above) about the Ltd Co. needing to pay her enough so that her gross earnings are at least £40k, I was under the impresssion that a company can contribute any amount to an employee's pension without being limited by salary (this will not attract any tax relief as I understand).
Did I get this wrong? Or is such company contribution only available to Directors?
Thanks again for your comments.

[Alaric]

I was under the impresssion that a company can contribute any amount to an employee's pension without being limited by salary (this will not attract any tax relief as I understand).
Did I get this wrong? Or is such company contribution only available to Directors?

With a Company contribution you would have to watch out for "Benefit in Kind" rules. In other words tax on implicit non-salary benefits.