zlb
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Post by zlb on Jan 21, 2024 14:39:53 GMT
Can I include my earnings from savings interest as my income for the purposes of pensions contributions? Does anyone know? Eg if I earned £10k in savings interest, can I use that in my calculation for private pension deposit?
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qwakuk
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Post by qwakuk on Jan 21, 2024 15:24:14 GMT
Can I include my earnings from savings interest as my income for the purposes of pensions contributions? Does anyone know? Eg if I earned £10k in savings interest, can I use that in my calculation for private pension deposit? no earned income only or limited to £2,880 net
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Post by c64 on Jan 21, 2024 16:22:08 GMT
But some more detail might be useful and I am at a loose end :-)
You can contribute however much you like, but there is a limit on the amount you can contribute and gain income tax relief. That is limited to your "net relevant earnings", and if your grossed-up contributions exceed that value, you will have to declare it and cough up the excess relief granted. NRE is not quite the same the "Pay, pensions, profit etc." section on your self assessment tax calculation which is taxed at the earnings rates: notably, pensions in payment are taxed as earnings, but don't count towards NRE. Neither it the same as "Total income on which tax has been charged" value, even if all your income is earnings, because that value is after the deduction of allowances. And neither is it the same as the amount of annual allowance you might have: even if you carry forward say £40k AA from previous years, you still can't make that contribution and gain tax relief on it unless you have the NRE to count it against.
The upshot is that when people ask your question, what many of them actually mean is "I've got £10k in savings income and I earn £30k, can I put the £10k interest in my pension and get tax relief?" And the answer is often "Stop compartmentalising. Unless you are already whacking almost your whole salary into it, yes you can contribute another £10k gross, because it's more salary you're putting in, you're keeping the savings income to buy food with". Furthermore, it doesn't matter if you pay tax on the earnings already or not. You can contribute the *whole* NRE and get the tax relief, including the bottom 12k+ which is covered by your allowance(s) and on which you were never going to pay tax in the first place (!)
Also: salary sacrifice, NI, inheritance tax avoidance, maximisation of 5k zero-rate savings band, minimisation of marginal effects child benefit, interaction of pension relief with gift aid VCTs seafarer's deduction etc. etc.
But if your earned income is zero or thereabouts. It's easy. See qwakuk
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zlb
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Post by zlb on Jan 21, 2024 17:52:09 GMT
But some more detail might be useful and I am at a loose end :-)
You can contribute however much you like, but there is a limit on the amount you can contribute and gain income tax relief. That is limited to your "net relevant earnings", and if your grossed-up contributions exceed that value, you will have to declare it and cough up the excess relief granted. NRE is not quite the same the "Pay, pensions, profit etc." section on your self assessment tax calculation which is taxed at the earnings rates: notably, pensions in payment are taxed as earnings, but don't count towards NRE. Neither it the same as "Total income on which tax has been charged" value, even if all your income is earnings, because that value is after the deduction of allowances. And neither is it the same as the amount of annual allowance you might have: even if you carry forward say £40k AA from previous years, you still can't make that contribution and gain tax relief on it unless you have the NRE to count it against.
The upshot is that when people ask your question, what many of them actually mean is "I've got £10k in savings income and I earn £30k, can I put the £10k interest in my pension and get tax relief?" And the answer is often "Stop compartmentalising. Unless you are already whacking almost your whole salary into it, yes you can contribute another £10k gross, because it's more salary you're putting in, you're keeping the savings income to buy food with". Furthermore, it doesn't matter if you pay tax on the earnings already or not. You can contribute the *whole* NRE and get the tax relief, including the bottom 12k+ which is covered by your allowance(s) and on which you were never going to pay tax in the first place (!)
Also: salary sacrifice, NI, inheritance tax avoidance, maximisation of 5k zero-rate savings band, minimisation of marginal effects child benefit, interaction of pension relief with gift aid VCTs seafarer's deduction etc. etc.
But if your earned income is zero or thereabouts. It's easy. See qwakuk Thank you. Let's say no earnings, or a profit way under tax threshold... one can put any amount into a pension pot but one can only claim tax back for a value up to one's earnings e.g. earn £30k, but deposits £40k but doesn't claim tax relief on the final £10k entered (I see why claiming tax is an optional tick box now). So, if I untick the box to claim tax relief when I make a deposit over my allowance, yet also declare on my tax return that I've made additional contributions over my allowance, what would I be 'coughing up' if I'd not claimed the tax back in the first place? Also carers allowance might apply in the future, or what the OPG calls payments for family care might apply in the future but all research I try on that is futile because all assumptions are for people who are over pension age.
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Post by c64 on Jan 21, 2024 19:09:43 GMT
For simplicity I'll assume you are talking about a standalone SIPP outside of work. Contributions are made net then the scheme applies "relief at source" by claiming the tax back from HMRC. Your £30k earner pays (again, round numbers for simplicity) 20% on £20k=£4k tax, having used his/her personal allowance on £10k of the earnings plus a couple of £1000 rental income or something which we will disregard. Now he has £26k and has paid £4k tax.
If he puts £16k of that in the SIPP, the scheme will claim £4k back from HMRC. The total, gross contribution is £20k. He is back in the position he would have been if the tax had not been paid.
If he puts £24k of that in the SIPP, the scheme will claim £6k back from HMRC. The total, gross contribution is £30k. This is the maximum contribution that can attract tax relief, as the NRE is also £30k. And yes, he still has £2k of his earnings left over because he's getting tax back on the £10k that was covered by the allowance.
If he puts other money in too, say £40k total, it depends how the individual scheme handles it. In my SIPPs, when I make a contribution I am asked what my NRE is, and (I presume that) the scheme would therefore do something about it if the NRE wasn't enough: either claim less tax back, or more likely refuse the payment to avoid having to deal with it. I'd have to lie or be mistaken about my likely earnings over the remainder of the tax year in order to just plough the money in regardless. If that happened, ultimately the obligation to pay the right tax remains with the taxpayer: I'd call HMRC, they'd [guessing here] eventually figure out how to deal with it and if the scheme had done what it was supposed to given the numbers I'd provided to it, I'd (rightly) be the one getting the balancing bill to put things back as they should be.
Note that hardly anyone does this. You're on the hook for tax if you ever take the money out, so the only reason to make a contribution without income tax relief is for estate planning, which an incoming Labour government may not be very keen on. It becomes relevant for third party contributions e.g. an employer.
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zlb
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Post by zlb on Jan 21, 2024 22:53:53 GMT
thank you c64 ... I'm not estate planning so it looks like it's not an option for me at the moment, and that an ISA of some kind would cost less because it's not taxed. I don't understand why one would have to pay a tax bill for making a contribution over the individual's annual limit. I see here, it says there's no limit but there is a limit if claiming tax relief which is misleading of there are additional costs to doing so. I'm a pension exploration newbie, it's mind boggling. www.gov.uk/government/publications/rates-and-allowances-pension-schemes/pension-schemes-rates#:~:text=There's%20no%20limit%20on%20the,of%20your%20UK%20taxable%20earnings
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Post by c64 on Jan 22, 2024 10:51:56 GMT
There's no *additional* cost to paying in unlimited sums, merely a requirement to pay the tax as normal rather than the excess contribution being allowed excess relief. It's your money and once you've paid the income tax via PAYE or self assessment you can put it into a pension as contributions in excess or NRE or you can put it in a hole in the ground. I'd rather have it in a hole in the ground a.k.a. an ISA, where at least I can then remove it when I retire without being stung for tax on removal. The sums *below* the NRE, however, I'd rather have in a pension for the immediate relief plus other tax planning benefits, on the assumption that the eventual taxes on withdrawal will be less.
If you only have savings, you don't need to worry about it. £3600 gross, £2880 net.
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zlb
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Post by zlb on Jan 24, 2024 11:17:45 GMT
Thanks @c34 I was thinking of your S&S ISA but worried I was missing something, especially after I came across some products I'm unfamiliar with like 10 year investment bonds and not understanding how they are different to having it in s&s ISA.
So if one pays in excess pension without claiming tax relief, from savings which tax has already been paid on.... then one will be paying tax on that money twice, once at PAYE and on pension draw down? If I understand correctly.
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Post by mostlywrong on Jan 24, 2024 11:26:12 GMT
There's no *additional* cost to paying in unlimited sums, merely a requirement to pay the tax as normal rather than the excess contribution being allowed excess relief. It's your money and once you've paid the income tax via PAYE or self assessment you can put it into a pension as contributions in excess or NRE or you can put it in a hole in the ground. I'd rather have it in a hole in the ground a.k.a. an ISA, where at least I can then remove it when I retire without being stung for tax on removal. The sums *below* the NRE, however, I'd rather have in a pension for the immediate relief plus other tax planning benefits, on the assumption that the eventual taxes on withdrawal will be less.
If you only have savings, you don't need to worry about it. £3600 gross, £2880 net.
A sum that has not changed since it was introduced some 25-30 years ago, IIRC.
MW
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