Pension Contributions

Pension Contributions

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Client paid £4800 per annum into a personal pension, grossed up to £6000 in 2014/15.

I've just prepared his 2014/15 Tax Return -His UK relevant earnings are £5650.

Presumably he's only entitled to tax relief on £4520 worth of net contributions, grossed up to £5650.

Is he expected to notify his pension company & repay the excess tax relief obtained in error, presumably £70 (£4800 - £4520 = £280 x 100/80 =£350 inc tax relief of £70?  

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By law man
10th Dec 2015 14:22

Unlikely, but one possible way out

As you know, an individual can pay £3,600 p.a. with no earnings to shelter it.

I think this means if you pay in more you must have earnings to shelter the whole amount, but just check if you can use the £3,600 in addition.

 

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By steve01257
11th Dec 2015 17:10

Fairly certain that the £3

Fairly certain that the £3,600 is not in addition to the earnings limit but can't give you a source to confirm. I think it is just a de minimis limit.

The quote below is taken from the pensions advisory service and may be of use. Also look to see if the payment was made in one go as you may be able to use pension input periods if that isn't the case.

 

 

 If you exceed the allowance

If you exceed the annual allowance in a year, you won't receive tax relief -on any contributions you paid that exceed the limit and you will be faced with an annual allowance charge. 

The annual allowance charge will be added to the rest of your taxable income for the tax year in question, when determining your tax liability. Alternatively, if the annual allowance charge is more than £2,000, you can ask your pension scheme to pay the charge from your benefits. This means your pension scheme benefits would be reduced.

Unless you have a money purchase annual allowance (MPAA), you may be able to bring forward any unused annual allowances from the previous three tax years, to either reduce your annual allowance charge to a lower amount or reduce the annual allowance charge completely. 

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By tonycourt
11th Dec 2015 17:46

It's more simple than that

The pension company should not accept contributions in excess of NRE unless the contributions do not exceed £3,600. It happens of course and when it does they should refund the excess contributions.

Naturally it follows that tax relief is limited to the maximum permissible contribution and if necessary capped by the annual allowance or the money purchase annual allowance.

  

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Replying to spilly:
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By steve01257
13th Dec 2015 09:57

Are you sure Tony?

My only experience is as a pension contributor so I have no first hand knowledge of exceeding the limit but the following is taken from Royal London web site and also covers the op's question more clearly.

Member contributions - tax relief and annual allowance

A member can pay as much as they like into a pension but unfortunately, there's a limit on the amount of tax relief that can be given.

How much tax relief is given?

 

Tax relief is calculated in tax years. In any tax year tax relief is only given on gross contributions of up to £3,600 or 100% of relevant UK earnings, whichever is the higher. Looking at two examples, a member with no relevant UK earnings can get tax relief on a contribution of up to £3,600 whereas a member with relevant UK earnings of £25,000 can receive tax relief on contributions up to £25,000.

 

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By tonycourt
14th Dec 2015 00:12

Yes

@ Steve

Yes, I am sure. You'll see slightly different commentary on different insurance company websites saying either you can pay as much as you like or that you can't pay more than your earnings and looking at the legislation I guess it can interpreted as either way.

The relevant legislation is at s.188 – s.190 FA 2004, In particular s.190(1) says

The maximum amount of relief to which an individual is entitled under section 188 (relief for contributions) for a tax year is (subject as follows) the amount of the individual’s relevant UK earnings which are chargeable to income tax for the tax year.

In other words contribution isn’t a qualifying one for tax relief if it exceeds relevant earnings.

Whichever interpretation you choose what is certain is, as you say in your post, you can’t receive tax relief for a pension contribution that exceeds your relevant earnings. HMRC's manual at RPSM0501000 et seq covers members contributions including situations where refunds can be made for contributions on which relief is not given.

 

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Replying to Red Leader:
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By steve01257
14th Dec 2015 11:22

Still not convinced

Tony,

We are on the same page as regards tax relief and hopefully have given the op enough information to resolve his situation.

However to conclude, reading RPSM0501000 "What is the annual allowance" section it says " There is no limit on the amount an individual can save in a pension scheme, but there is a limit on the amount that can get tax relief each year. If a member’s pension saving is more than the annual allowance they will pay a tax charge on the amount over the annual allowance. This tax charge is called the annual allowance charge.

The way I see it is if it were only possible to pay in up to the allowable limit then there would be no need for the annual allowance charge.

 

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Replying to Tax Dragon:
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By tonycourt
14th Dec 2015 12:01

Indeed

Thanks  Steve.

As you say the OP's question has at least been answered.

All I can add, just in case you're interested and you have the time to ponder further, is that, for example Hargreaves Lansdowne's site says that contributions are limited to earnings. Also a couple of years ago Aegon took the same approach when I contacted them. They were very adamant that they would not accept a premium in excess of earnings. That came from their a bod in their technical section. Also see RSPM05101510. It refers to refunds of excess  personal contributions, but unlike Aegon's approach it "may be refunded", rather than "must be refunded".

 

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By User deleted
14th Dec 2015 12:08

As much as you like

Good morning

I thought that I would clarify.

Our Accountancy firm also works in the same office as their sister company which is a firm of IFA's.

We come across this all of the time.

You can put as much as you like into a pension fund.

Any amount exceeding the annual allowance is not subject to tax relief and the tax element is therefore repayable through the tax return.

Some pension provides will not accept more than the annual allowance of £3600 or relevant earnings. Some do.

 

 

:)

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