Annual Allowance

[Jung200]

Hi, I’m hoping someone has a better understanding of the annual allowance in regards to pensions than me. In the next tax year, if my only income is a pension of 49k, do I have any annual allowance and what will it be? Thanks

Thanks. I’ve read different things which have confused me. One said the allowance is only as much as your income up to a maximum of 60k. I’ve also read a pension doesn’t count as earned income, so I’m confused.

Pensions aren’t qualifying earnings so you can contribute £2880 (£3600 gross).

Pardon?

Annual allowance is £60,000 from 23-24 tax year. That means if you put in more than £60k to a defined contribution pension or the calculated pension input amount into a defined benefit scheme is more than £60k then there is a tax charge to pay.

if the pension has already been claimed and is your income then income tax is payable as usual on that.

To elaborate - Tax relief is available to ‘relevant UK individuals’ under age 75 on pension contributions up to the higher of £3,600 or 100% of their ‘relevant UK earnings’ for that tax year. Contributions in excess of the annual allowance (including brought forward) would usually be subject to an income tax charge.

Relevant UK earnings for a tax year include:

• a self-employed individual’s profits from the trading year ending in the tax year. For partners, their share of profits
• employment income (including salary, bonuses, overtime and commissions)
• benefits in kind
• the taxable part of redundancy payments - the first £30,000 is tax free
• taxable payments in lieu of notice

They don't include:

• dividends
• savings income
• rental income
• pensions in payment
• State benefits

So if your only income is from a pension, the max you can pay in is £2,880, which is grossed up to £3,600 by the basic rate tax relief once it goes into the pension.

There are a few incorrect answers on here.

Your pensions annual allowance (the amount you can get tax relief on) is either 60k or the amount of your annual earnings - whichever is LOWER.

So if your earn 49k, the most you can put in with tax relief is 49k.

Actually, I can see that your saying your pension is 49k. Is that income?

Because if your are already drawing on your pension, your annual allowance can drop to 10k.

But it sounds like you might be conflating two things.

What is it you want to do?

I read the post that the OP is a pensioner with 49k income from the pension and wants to know how much tax will be deducted

I thought they were asking that too.

OP can you clarify. Do you want to know how much you can contribute to your pension and receive tax relief (although I don't know if the rules that prevent 'recycling' of pension money and benefiting from tax relief a second time are applicable here).

Or are you asking what tax you will pay on an income of £49k? In this case, the tax is the same no matter whether it's salary or pension, although I don't know if NI is due if you're under state pension age.

The OP states the £49k income is from a pension…. So as posted above, the only amount that can be contributed (absent any other earned income) is £3,600 gross.

Thanks everyone. Sorry it’s a confusing situation, I’ve just been ill health retired & am filling out my forms. It’s a DB pension & I'm going to go way over my annual allowance due to the significant uplift in pension, even taking carry forward into account.

I’m wondering if I delay taking the pension until next tax year, will I have a 60k annual allowance next year or will I not have any annual allowance because my only income will be a pension?

Thanks. That’s what I thought, but the 49k income will be a pension, so does that affect the amount of AA?

There are some special rules, including for ill health pensions. But you must meet their "severe ill health" criteria. Usually this is part of the medical assessment by the pension scheme medical adviser. Your assessment certificate will say if you meet their test. Have you had the assessment yet?

By "their" I mean the HMRC rules.

I would agree with this.

Otherwise it's pension "recycling" and the OP would be getting tax relief twice.

I'm not sure I understand the wider question though, OP.

If you are (presumably) retired and your only income is 49K from a DB pension, why are you wanting to pay into a pension?

Thanks, yes I got tier 1 ill health retirement but didn’t hit the criteria for severe ill health, so I have to pay the tax charge.

Thanks. Because I’m just filling in my pension forms now & am wondering if it’s best to wait until the new tax year for the pension to start so I can use my 60k annual allowance from next year if it exists. I’m not wanting to pay into a pension, but use my allowance towards the uplift in my ill health pension, otherwise my tax bill is going to be huge!!

Have you spoken to Pensions Wise @Jung200
It’s free impartial guidance, they can talk you through all of this and make it specific to your situation. Lots of good guidance from PP here but you don’t want to make a bad choice. Also, there’s the option to pay for advice, and if you have a DC pot too, you can fund up to £500 tax free from there. It’s called the Pensions Advice Allowance.

Don't forget you can carry forward your pension annual allowance if you have any unused from the last 3 tax years?
(I had this when my DB pension was revalued but just about managed to cover it through carried forward allowance.)

Thanks, yes, but I’m under 50 so they won’t help. I do think I’d better pay for advice as I don’t want to make a mistake I regret!

Thanks. Yes, but I only have 1k allowance left from 3 years ago, then a bit more from the last 2 years, but it will only make a small difference.