Pension tax relief on low income

[Buttercreams]

I earned £7500 this year - self employed. No other income.
I want to put it all into my pension.
Is that allowed?

The maximum contribution you can make to attract tax relief is £2,880 (£3,600 gross).

You can put in all your earnings, but as a non-taxpayer you'd only get the tax relief on the first £2,880 net.

Thank you.

I’ve done my accounts and wanted to add a payment in to account for the rest of my income for this year... but there is a big problem.

So I’ve already got about £5k in there and now it’s got £1k tax in there or something. How do I give it back?! Can I just write a cheque or have I committed some sort of tax fraud?

Presumably the pension provider has a form so that this doesn’t happen next year? (I will probably earn similar next tax year).

I was inspired to increase my pension contributions but it seems I haven’t thought this through.

Bloody hell.

Bumping for the evening crowd...Can anyone help?

I would call your pension provider, as they’re the ones that have added it. They mostly have a system in place where they add it instantly when you pay in, and sort it out with HMRC in the background. So you need to make sure they’re aware anyway.
Not sure if they can reverse it. If they can’t, just call HMRC helpline. I do find them quite helpful usually! You’re not going to get done for fraud if you tell them what’s happened.

Aargh, ignore my previous post. That’s not quite right.

You can pay 100% of earnings into your pension, but that’s the sum AFTER it’s been topped up by the government. The top up is 25% of what you put in. So in your case, if you earn £7500, you can pay £6000 into your pension and it will be topped up to £7500.

The other £1500 which you’ve earned doesn’t qualify for any pension top up so you may as well hold onto that. Yes, it’s free money.

There’s a calculator showing how much you can contribute here: www.which.co.uk/money/pensions-and-retirement/personal-pensions/contributing-to-a-private-pension-explained/tax-relief-on-pension-contributions-explained-a27f53z7qg3f

@ForensicAccountant Yes you can! I’ve done it.

However not everyone is able to claim the extra relief - it depends how your pension payments are made. Buttercreams should be able to get it.

It’s an anomaly in the system which the government is looking to fix. They ran a consultation on it last year - here’s the call for evidence www.gov.uk/government/consultations/pensions-tax-relief-administration-call-for-evidence.

I’ve attached a screenshot from the consultation document showing two low earners who both pay the same amount into a pension, and one gets the extra relief and the other doesn’t.

The example is about two people who don’t earn enough to pay tax. One of them gets a £20 top up because of the way their pension is paid, and the other doesn’t. It’s unfair, but that’s just how it is at the moment for non tax payers.

Buttercreams is getting the top up and can save up to 100% of her income: £6000 from her earnings and £1500 top up. You can check it in the Which calculator I’ve linked to above.

This is true for higher earners too, up to £40,000. E.g. if you’re earning £25,000 you are entitled to pay £25,000 into your pension - £20,000 from your earnings and £5,000 top up. The top up is higher than the tax you’ve paid. It’s not the same as a rebate.

@Sunseed and @ForensicAccountant
What you’re saying contradicts this information from the Low Incomes Tax Reform Group:

.... if your pension uses the ‘relief at source’ method of tax relief and you earn, say, £5,000 in the 2020/21 tax year, you can make a gross contribution of up to £5,000 into that pension. This equates to a net contribution of £4,000, because the pension scheme will claim tax relief of £1,000. If you earn less than £3,600, you are limited to tax relief on a gross contribution of £3,600 (£2,880 net). In either case, the fact that you do not pay any income tax does not prevent the pension scheme claiming the tax relief.

www.litrg.org.uk/tax-guides/tax-basics/do-i-have-join-pension-scheme/do-you-know-how-tax-relief-your-pension

Morning tax people.

Thank you so much for all the considered responses. It would seem more controversial than I’d realised & I'm lucky the pension uses the ‘Relief at Source’ method!

So if I’ve understood correctly next year I should contribute 80% of my income ...

As for what’s happened tho year I will call the tax people and ask their advice.

Thank you again!

@bobbinpuffins is correct.

I paid in 100% of my salary (£15k inc the top up) and also paid into a LISA when I was on maternity leave - this meant I got £4K in top ups but only paid about £600 in tax.
When I pay into my pension (Standard Life) directly they add on the top up.

Puffins - I stand corrected and you are right.

No problem Forensic. The more people that know about this the better.