Tax Status after Personal Pension Payment

[paulatscafell]

Hi all,
Hoping for some advice from someone more knowledgeable than myself.

I took voluntary redundancy at the end of March 2019. Redundancy was paid at the end of April 2019. Total received £69,117.28 minus tax free £30,000 left me with taxable pay of £39,117.28 on which I paid £16,352.63 in tax under a 0T tax code. As I was not expecting any further earnings in that tax year I put in a claim for a tax rebate and was refunded £11,029.23. This left me with taxable pay of £39,117.28 and paid £5,323.40 (£16,352.63 - £11,029.23) in tax after deducting the tax rebate from the initial tax payment.

I then received a letter from my ex-employer notifying me that I was to receive a bonus of £2,100 at the end of June 2019, on which I paid £420 in tax. Taxable pay for the year is £41,217.28 (£39,117.28 + £2,100) on which I have paid £5,743.40 (£5,323.40 + £420) in tax.
I am looking to make a contribution to a personal pension before the end of this tax year which I intend to start drawing on in the next tax year commencing in April 2020. My initial thought was to pay enough into the pension to enable the pension company to claim tax relief at the basic rate equal to the amount of tax I have paid on earnings this tax year: tax paid £5,743.40 / 0.2 equals pension payment of £28,717. If I pay in £29,000 to the pension, what is my tax status?

Taxable pay reduced below the basic personal allowance of £12,500, (Taxable pay £41,217.28 – pension payment £29,000 = £12,217.28). Which would enable me to reclaim the tax paid on my Halifax Reward account payments (£6) and receive slightly more than £1000 in savings without tax.

OR

Basic rate tax band extended by pension payment, which would not enable me to reclaim the tax on my Halifax Reward account payments or receive slightly more than £1000 in savings without tax.

Many thanks in advance for any advice.

[Chrysalis]

I think you need to make the payment net of the tax relief (ie 29,000 x 0.8), the tax reclaim will go into your pension directly and then I think your taxable pay is reduced by the gross pension contribution. But I’ll await other opinions.
I think it’s also the case that you can get 20% tax relief even on contributions that go into the personal allowance (ie that you haven’t paid tax on). (Ie if you contributed £32,000 that would count as a gross contribution of £40k and you’d get £8k in tax relief). Whether it would get clawed back in self assessment I am not sure, but I don’t think so (because low paid workers who don’t reach the tax allowance are still entitled to tax relief on their contributions).

[Charlottesquare]

The pension contribution extends the basic rate band, so if you say pay £20,000 net into the pension the gross is £25,000, the pension company recovers direct into the fund the £5,000 and in your tax return you declare the £20,000 net/£25,000 gross contribution and this extends (increases)your basic rate band , however given your numbers none of your earnings are in higher rate so the basic rate extension will have no value re your personal tax bill.

In effect you get the 20% tax relief via paying net and you only get the higher rate relief 9the other 20%) through Self assessment if you actually suffer higher rate tax, you have not.

[JohnB]

You can get up to £40k credited to your pension in a year (and carry unused allowances for the previous 3 years), with the caveat you must have earned enough, so in your case, £71k odd if you have the allowance. That includes company pension contributions (did any sneak into the new tax year), your contributions, and the government tax relief, so you could put in 50k and the pension fund could claim 12500 from the government.

None of this makes a difference on the tax you actually paid, unless you drifted into HRT, which you did not. You don't need to have paid the tax to get the tax relief, and interest/dividends do not count as earnings.

NB, if you plan to draw your pension in April as a single sum for the year, HMRC will delight in assuming that it will happen every month, and give you a huge tax code and predicted tax take unless you notify them sharpish that it was a one-off.

[fca2019]

You can get up to £40k credited to your pension in a year (and carry unused allowances for the previous 3 years), with the caveat you must have earned enough, so in your case, £71k odd if you have the allowance.

Hi, I believe the 30k tax free does not count as qualifying earnings. Therefore he can only put in 32k and the provider will add 8k tax relief to 40k limit.

[ursaminortaur]

You can get up to £40k credited to your pension in a year (and carry unused allowances for the previous 3 years), with the caveat you must have earned enough, so in your case, £71k odd if you have the allowance.

Hi, I believe the 30k tax free does not count as qualifying earnings. Therefore he can only put in 32k and the provider will add 8k tax relief to 40k limit.

Yes, the tax-free £30,000 doesn't count as relevant earnings and the maximum that you can contribute to a pension in any year and get tax relief on is limited to your relevant earnings.

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/member-contributions-tax-relief-and-annual-allowance/

Redundancy payments

Only part of a redundancy payment counts as relevant UK earnings. A redundancy payment can be made up of the actual redundancy payment and other payments such as salary, payment in lieu of notice or holiday pay. Any part of a lump sum redundancy payment that comes from salary, payment in lieu of notice or holiday pay does count as relevant UK earnings. However, only the part of the actual redundancy payment over the tax-exempt threshold of £30,000 will be classed as employment income and therefore count as relevant UK earnings.

Let's look at an example where a member receives a lump sum payment on redundancy that's made up as follows:

One months salary - £2,500
One months salary in lieu of notice - £2,500
Holiday pay - £750
Redundancy payment - £31,250
Total - £37,000

The first three items all count as relevant UK earnings . In addition to that, £1,250 of the redundancy payment is also classed as relevant UK earnings.

[pochisoldi]

(figures rounded)
The simple answer is that you've grossed £41200. Unless your other income takes you over £50k, you won't be paying tax at 40%, and there will be no tax refund.

If you pay £41200 (gross) into the pension (assuming you can carry forward £1200 pension input from the previous three tax years):

The first £12500 of the £41200 will consume your personal allowance and will be taxed at 0% (despite getting 20% tax relief at source)
The remaining £28700 will be taxed at 20%. HMRC will hand that tax over to the pension provider.
The contributions as a whole will increase your basic rate tax band by the gross amount.
If your remaining income is less than £50000, and you have less than £1000 savings, and £2000 in dividends, and any other income was taxed at source, then there will be no tax refund or further tax due.

If you have claimed JSA, then it is likely that there may be some tax due on whatever was paid (JSA is taxable but paid gross, and you've already used up your personal allowance.)

If you pay £41200 (gross) into the pension:
No tax refund due, if you claimed JSA, or have savings > £1k, dividends >£2k then there may be tax to pay.
You will have £2500 left in the bank after making your pension contribution.
Your pension fund will be increased by £41200

If you do nothing:
No tax refund due, if you claimed JSA, or have savings > £1k, dividends >£2k, or your total gross income exceeds £50k then there may be tax to pay.
You will have £35460 in the bank
Your pension fund will be unchanged.

If you can afford it, and the pension rules allow you to do what you want to do, then IMHO do it..

PochiSoldi