Tax relief and putting a lump sum into a pension

[246tef]

We have just inherited a small sum and I was hoping to put it into my pension. I just wondering what tax relief I will get back. I earn 60k so higher tax rate. Will I get 40% back or just 20%? Haven't been able to find an online calculator. If its 40% then I might put in a little bit less and use it to have a longed for holiday but at 20% it might as well all go in. Any advice

www.gov.uk/tax-on-your-private-pension/pension-tax-relief should answer your questions.

So if I read this right - then you only get 40% tax relief on the sum over the tax threshold. So if I earn 60k - then I only get 40% for the 10k. A lot of the online advice seems to suggest that it would be 40% tax relief on the whole sum but thats not how I read government advice. Is that correct? Sorry that I sound rather confused

You wouldn’t get 40% on the whole £15k because you were not taxed 40% on the full £15k.
Your salary is taxed @ 20% for the amount between the personal allowance and ca. 50k. You pay 40% tax only on the £10k above 50k.
from the website: you will get automatic tax relief @ 20% on the full £15k.
You can then claim an additional 20% on the £10k via self assessment (this is the 10k where you are normally taxed 40%).
You didn’t pay more than 20% tax on the remaining £5k so you can’t claim additional tax relief.
This is why it’s easier to pay contributions via salary sacrifice when you can (no self assessment and you also save in NI contributions)

If I understand correctly, you are asking about putting inherited money into your pension. As you didn’t pay income tax on this money there is no tax relief to consider. However, you could maximise your pension contributions from your salary (which is taxed of course, and therefore would benefit from tax relief if diverted into a pension) and “live off” the inherited money in the interim.

No sorry this isn’t right, OP will be able to obtain relief on the pension contribution.

That’s really just a technicality and is confusing the issue to mention it I think, as long as op isn’t putting more than her salary into her pension (subject to the annual cap) it doesn’t matter where the actual money came from, it’s all out of one pot

Can’t you put it into a SIPP and get tax relief at 20% added in automatically by the SIPP provider? I don’t think it has to come from your salary (there may be some NI etc advantages but it also may not be the bast pension from a workplace).

Cross posted with @Morph22010 !

And @Christmascracker0 !

You don’t have to do self assessment for this specific purpose if you don’t already, you can write to hmrc with proof of the contribution and they’ll adjust your paye to get the higher rate relief

The easiest way to claim the relief it is by calling HMRC or updating your online account 😊

I think you have to claim the tax relief in the following year’s tax return for the 40% bit.

So the 20% is automatic, and would be received into your pension within a matter of weeks and the 40% (not reclaimed on full amount) is generally reclaimed and offset against your tax in the following financial year.

You don't say how much, but be aware there is the Annual Allowance which limits tax relief to £40k of contributions (less for much higher earners). If the £40 limit is an issue for you, you could pay some now and more in April (next financial year).

How?
You can only claim tax relief where tax has been paid in the first place.
If I found some cash tomorrow and added it to my pension, I could not claim tax relief on it. Tax relief, by definition, only applies where tax has been paid. Happy to be corrected but please point me to the the source (eg HMRC etc)

Ah ok I just saw this. I see now what the OP is doing, yes that makes sense. I wrongly assumed she was putting in more than her salary.

@2023username yes you can get tax relief on up to £40000 in any tax year but not more than your annual salary. So if you have earned £20k in one tax year you can’t put in any more than that and get tax relief added on.

Another thing to check OP is the carry forward of unused annual allowance - so if you didn’t invest 40k each of the last 3 years you can carry it forward and benefit from it…

Thanks everyone. So I would be putting in more than my salary around 85k - in which case I guess that I'd need to put 40k before April and 40k after. Would I then need to claim the additional 20% on the 10k each time directly from HMRC?

Good call about the allowance - definitely have some left over across the last three years.

Yes I believe that’s the way you do it - although as precious poster said you can also use up unclaimed previous allowance on past three years - but for the tax relief the way you describe is best.

You are wrong.

If you have a SIPP for example and you put money into it from any source you like they will automatically add the 20% tax relief.

But you need to make sure you only put in the max you are eligible for, e.g. 80% of your pre-tax salary (so that when tax relief is added it doesn’t exceed your salary), less than £40k, and assuming your MPAA (Money Purchase Annual Allowance) hasn’t been reduced to £2.8k due to being a non-tax -payer or being in taxable pension drawdown.

Tax relief is given when you put money in your pension and then when you take money out of the pension it is taxed (within certain rules) - that is how it is balanced - it has nothing to do with whether tax has been paid.

This should be obvious as putting money into your pension from a salary reduces the income tax you pay and additionally adds tax relief into your pension.

For example, one person could take tax-free money out of their pension after age 55 and put it into their spouses pension gaining an extra 25%. E.g. I could take £12k tax free from my pension when I am over 55 and put it into my other halfs SIPP and that £12k would get an additional £3K added as tax relief - this is all fine as long as my other half earns £15k per year. In this scenario I would be effecively gifting my other half £12k and she would be paying it into her pension and getting tax relief which is no different to her putting pre-tax wages of £12k into her pension and keeping the £12k from me.

Another example; someone on benefits that pays no income tax, can theoretically put £2,880 into their pension and get tax relief on it making it up to £3,600 - this money could be a gift from parents or simply savings from their benefits.

@RandomPerson42 if I want to put in an extra lump sum and I’m allowed to put in 80% of salary (not above £40k I know) then do I count in the employers contribution to a private pension or is it just what I’ve put in from my salary?

OP there is a wealth of info here which should help you
www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/tax-relief-and-your-pension

The 40k AA limit is the total of all contributions including employer

www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/the-annual-allowance

It won’t let you update pension contributions online I tried recently. Also when you phone they ask you to write in with proof although that could depend who you speak to