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Higher rate tax relief on pension contributions

Carry forward of annual allowance

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Client expects to have employment income of around £90k in 2021-22. He intends to make contributions into a SIPP and wishes to maximise the potential tax relief. 

He has been a member of a registered pension scheme in previous tax years, but no contributions made. 

I think his maximum potential contributions in 2021-22 = £40k allowance from 2021-22; £40k unused allowances from each of 2018-19, 2019-20 and 2020-21. However, maximum tax relief will be capped at his level of income in 2021-22, so there is no point him contributing any more than his total income in 2021-22, i.e. £90k (or should this be £77,430, i.e. less the value of the personal allowance on which no tax relief will be obtained as none was paid?)

- Client thinks he should be entitled to tax relief based on the higher rate tax that he paid in the previous tax years, but I don't believe this is the case - i.e. the tax relief is only available in the year the contribution is actually made (2021-22) using a maximum contribution based on brought forward unused annual allowances and total income for 2021-22.

Just wanted to check that my understanding was correct.

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By Matrix
11th Oct 2021 17:05

Agreed, tax relief will be based on the tax paid in 21-22. If he is an employee then I assume he already has made contributions which will need to be taken into account before determining the AVC.

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By David Ex
11th Oct 2021 17:29

If the use of brought forward allowance is discretionary, he could presumably use just enough to extinguish his higher rate liability. If that’s possible, you need to check whether that risks losing unused allowances - and, indeed, what he believes his earnings will be over the next few years.

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By More unearned luck
11th Oct 2021 18:02

Any amount can be paid in pension contributions. On your figures, tax relief is however limited to the first £90K thereof.

It's wrong to say that there will be no tax relief on the first £12.6k as the first £90k is paid net of tax. That tax is not repayable because the income is taxed at nil (cf stakeholder contributions paid by non-taxpayers).

The answer to give the client is that unused relief is c/fwd, not contributions c/back.

At this stage you can only estimate relevant earnings. Therefore the best policy is too estimate high and then get a refund from the provider to the extent overshot, but check provider is willing to make such refunds first.

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Replying to More unearned luck:
Psycho
By Wilson Philips
11th Oct 2021 21:36

More unearned luck wrote:
Any amount can be paid in pension contributions. .

True - but exceed Annual Allowance (including c/fwd) and you’ve got a nasty charge.
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By Not Anonymous
11th Oct 2021 19:27

(or should this be £77,430, i.e. less the value of the personal allowance on which no tax relief will be obtained as none was paid?)

If this is going to be a relief at source contribution then you have misunderstood how they work, basic rate relief would be given on the whole amount irrespective of how much tax has been paid. The client pays the net amount i.e. £72k, and basic rate relief is added by the pension company making a gross contribution of £90k.

Although this might be maximising tax relief in the current tax year it might reduce the amount of relief due overall if he expects similar earnings in future years.

Tax paid in a prior year has no relevance to the amount of tax relief due.

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By Paul Crowley
11th Oct 2021 21:18

I get questions like this from clients
They never actually pay the maximum
Ask client what he wants to pay then work from that

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By Paul Crowley
11th Oct 2021 21:18

I get questions like this from clients
They never actually pay the maximum
Ask client what he wants to pay then work from that

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Replying to Paul Crowley:
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By Truthsayer
12th Oct 2021 13:43

You can say that again.

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