Pension questions

[UpsideTango]

I've been reading Money Saving Expert but am a bit confused.

The annual cap on adding to a pension is £60,000 and you can use any unused from the last three years up to your annual salary.
It uses the example of someone earning £90k pa.

But what if you earn say £20k pa.
Can you only put in £20k per year (and get tax relief)?
If last three years allowance is unused does that mean you can put in £60k (and get the tax relief) or only £20k?

Also, the cap, does it include everything you have added (via salary) AND what your employer has added - or is it just your own contributions?

You can only receive tax relief on contributions up to 100% of your income, so while you could pay in 60k (a big lump sum rather than from earnings), you would only recieve relief on 20k (in your example). You would have to do this as a contribution to a private pension as your employer won't make/deduct contributions that would take you below minimum wage. I think.

Thank you Krieger.

Next question is: if you made payments into a private pension that could attract tax relief -
Does the pension provider apply the relief (and if so, how do they know how much 'allowance' you have left)?
Or do you just write a letter to HMRC to get the tax relief? And if so, do you then have to fill out a self assessment form?

I believe that the relief is automatic applied to a point. The personal pension provider will add on the tax relief in line with the tax bracket. You can apply to hmrc for further relief above that automatically added if it is due. I believe goat is how it works

Re tax relief, it depends on the pension scheme. If you pay into a private pension scheme, it's usually deemed net of tax and HMRC pay in the basic rate tax relief directly to the pension scheme, and the taxpayer claims the higher rate tax relief via their SA tax return (assuming you're a higher rate taxpayer, which in this case, sounds not).

If it's additional payments into an employers pension scheme, it may be the same, or it may be a gross payment where HMRC don't pay the basic rate tax relief into the scheme and then it's up to you to claim all tax relief, i.e. basic rate and higher rate (if applicable) via your SA tax return.

The annual limit is your wages or £60k - whichever is lower. Unused relief can indeed be carried forward 3 years.

But be very careful with income if only £20k. You'd get basic rate tax relief if it's a private pension where HMRC pay in the deemed Basic rate tax relief, but otherwise, if you're going to have to claim relief via your tax return, it will be limited to how much income tax you've paid. So on a wage of £20k, you only pay income tax on £7.5k, so you've no tax relief to claim on any pension payments over £7.5k.

I'd suggest you get professional advice and also be 100% certain as to your pension scheme and how the tax relief works for it. It could be an expensive mistake if you make a huge payment and find that the tax relief isn't as much as you thought it was!

@UpsideTango

To answer your questions...

The annual cap on adding to a pension is £60,000 and you can use any unused from the last three years up to your annual salary.
It is known as the 'annual allowance' and is the most you can pay into a pension before you have to pay tax on the contributions. It is £60,000 per year and you can use the previous years unused allowance as 'carry forward. BUT only once you have used up this year's allowance.

And the second important part is you can only contribute up to the maximum of your annual salary

But what if you earn say £20k pa.
You can only contribute a maximum of £20,000, so therfore can't use any carry forward

If last three years allowance is unused does that mean you can put in £60k (and get the tax relief) or only £20k?
Nope on £20k

Also, the cap, does it include everything you have added (via salary) AND what your employer has added - or is it just your own contributions?
The annual allowance covers all pension contributions

@Badbadbunny says
"But be very careful with income if only £20k. You'd get basic rate tax relief if it's a private pension where HMRC pay in the deemed Basic rate tax relief, but otherwise, if you're going to have to claim relief via your tax return, it will be limited to how much income tax you've paid. So on a wage of £20k, you only pay income tax on £7.5k, so you've no tax relief to claim on any pension payments over £7.5k."

This is not correct for personal pensions - you get tax relief on all your contributions. Most personal pensions get 'relief at source' which means the tax is automatically credited to the pension at the basic rate. So if you wanted to pay £20,000 into a personal pension, you'd actually contribute £16,000 and the scheme would automatically credit £4,000

As I said it depends on the pension scheme. Not all are set up where HMRC pays the basic rate tax relief. The OP needs to be crystal clear exactly what kind of pension scheme they intend to use and how the tax relief works.

I've had clients fall into this very trap, particularly when making additional voluntary contributions into an employer pension scheme, where such contributions are gross and the employee has to claim whatever tax relief is available via their SA tax return, which is limited to how much income tax they've paid in that tax year, so it is easy to get caught out and not get as much tax relief as expected.

But yes, if a "normal" private pension scheme, then it will almost certainly be paid net of tax rather than gross, with tax relief at basic rate paid directly to the pension by HMRC.

The devil is always in the detail, and assumptions are very dangerous when it comes to tax and pensions!

@Badbadbunny apologies I didn't mean to do you a disservice, re-reading your post and mine I probably could have worded mine better

Anyway @UpsideTango I hope this thread has been useful. Pensions are that complex but there are various bear traps out there for the unwary

Thank you everyone.
I will investigate my options.
Considering everyone needs a pension I think it should be more straightforward.