Tax relief is available on contributions up to the higher of 100% of relevant earnings and £3,600 gross. There is no limit to the contributions that can be made, but whether they qualify for tax relief and whether there are effects for the annual allowance charge and the lifetime allowance charge are a different matter.
For employees such as your client, relevant earnings include employment income chargeable to UK income tax which includes benefits etc. The amount of the relief on the contributions depends on the individuals marginal tax rate. Most relievable contributions made by individuals are paid net of basic rate tax and so relief is given by extending the basic rate band by the amount of the gross payment, reducing the income chargeable to higher rates of income tax. Where relievable contributions are made gross, a deduction is given against taxable income.
Where relievable contributions are paid net of basic rate tax, the pension scheme will then recover the tax from HMRC which will then get added to the pension fund.
If the individual is a higher rate taxpayer, as your client will be, they will need to make a claim for any further tax relief. This is usually done via self-assessment. However, HMRC’s guidance on Pension Tax Relief states that you can call or write to HMRC if you are outside of self-assessment or want to amend your PAYE code.
If the individual contributes to their employer’s occupational pension scheme, tax relief can, in some cases, be given through the PAYE system via a “net pay arrangement”. The employer deducts the contribution from gross pay before income tax is deducted on the balance (this has no effect on NIC payable). The employer will pass the contribution to the scheme. The individual has obtained income tax relief by a deduction from their taxable income. See PTM044230 for further information.
Employer contributions are paid gross, and relief is claimed via CT self-assessment. In some cases, it can be efficient to consider the overall remuneration package and increasing employer contributions which will result in NIC savings.
The annual allowance charge is strictly a separate issue from the tax relief due on contributions although its effect is to reduce the overall relief given. It does this by imposing an income tax charge on the excess of the “input amount” from all contributions (whether by the individual, their employer or anyone else) over the annual allowance. The annual allowance can be tapered downwards in some cases. Unused relief may be available for the previous three years which can be used in the current year to increase the available annual allowance. The calculations can be complicated in some cases and so see HMRC’s guidance at PTM050000.
The lifetime allowance is a complex issue affecting higher value pensions schemes. See HMRC’s guidance at PTM080000.
It is advisable, before any advice is given to your client, to review the history of their pension schemes and contributions to identify whether the annual allowance or the lifetime allowance are issues that need to be considered. In some scenarios, the assistance of a suitably qualified IFA can prove helpful.
Please share this article with your clients
