Does the £4,000 ceiling apply to my personal situation? Can I apply for 40% tax relief if everything else is correct as I see it?
10 February 2022
Question by Andrew
Hello,
I wrote to the HMRC following phone call to them. Below is what I wrote in November and have heard nothing since then. In reading the below is my understanding on the two questions correct and is it best to wait until they do reply?
I am writing in the hope you can help me. I’m not sure that this requires me to employ an accountant and thought my best approach to contact you first. I have spoken with HMRC on the phone and they suggested writing would be best.
I started taking my BBC direct benefits pension in 2017-2018 along with an income from John Lewis. In 2018-2019 I had three incomes one for John Lewis, one for Sky and my BBC Pension. I believe this moved me into the 40% tax bracket. In 2019-2021 midway through I was tupied out of John Lewis to a company called CBRE so with a part income from both companies, sky and my BBC pension exceeded the 40 % again. In 2020-2021 I left CBRE so my only income was from my BBC pension and my PAYE pay from SKY again exceeding the tax ceiling for paying 40% tax.
I thought I could possibly claim 40% tax relief on the pension contributions Sky taken direct from my salary with Sky, I looked into this and it seemed the only way to do this was through a tax return as it’s not automatic. Whilst looking into this I read about a 4K ceiling for contributions to a pension if you had already taken a pensions as income. I also read this only applies to direct contribution pensions. At present I’m confused and wanted to seek verification as I am allowing Sky to take payments from my earnings I believe monthly amounts will exceed the 4K ceiling to the pension fund. Does the 4K ceiling apply to my situation? Can I apply for 40% tax relief if everything else is correct as I see it?
Answered by
Hi Andrew,
Thanks for your question.
The £4,000 contribution ceiling you have read about is called the Money Purchase Annual Allowance (MPAA) which comes into effect when someone takes an income from a defined contribution/money purchase pension flexibly. This can be in the form of:
- If you take an income from a Flexi-Access Drawdown plan.
- If you take the entire pot as a lump sum or a series of lump sums. The jargon terminology for this is UFPLS (uncrystallised fund pension lump sum) which can be a bit of a mouthful.
- If you have a Capped Drawdown plan and exceed the maximum income limit.
- If you purchase a flexible or investment linked annuity.
From the information you have given in your question, the £4,000 ceiling would not apply to you as you have only taken an income from your BBC Defined Benefit scheme.
Whether you can claim the higher rate tax relief depends on how your Sky pension contributions are paid into your pension plan. There is the relief at source method, net pay method and via salary sacrifice.
Relief at source
Relief at source is where your employer deducts your pension contributions from your take home pay. This is after Income Tax and National Insurance Contributions have been deducted.
Your pension provider then claims basic rate tax relief (20%) from HMRC. HMRC sends this to your pension provider who adds this to your pension pot. As a higher rate taxpayer, you would then need to claim any additional 20% tax relief yourself through your self-assessment tax return.
Net pay method
Net pay method is where the pension contribution is paid from your gross salary before the deduction of Income Tax. This method therefore does not require reclaiming tax relief because you are essentially paying less tax already.
Salary sacrifice
Salary sacrifice is where you give up part of your salary to receive additional benefits from your employer such as pension contributions. As you are giving up part of your salary you pay less Income Tax and National Insurance Contributions. In addition, your employer will not have to pay their Employers' National Insurance contributions on the portion of your salary you are sacrificing.
Some employers pass on some, or all, of these savings to you, which increases your pension contribution further. Any contributions made through salary sacrifice are exempt from tax relief as you’ll have already benefited from reduced tax on your lower salary. For this reason, you wouldn’t need to complete a self-assessment tax return and cannot claim tax relief.
The Money Helper website have a good guide explaining the different ways pension contributions are paid. You can read it here.
Sky pension scheme
I have done some digging on Sky’s (the entertainment company) employee pension website to see whether it states how pension contributions are made into the scheme.
It looks like from here, Sky pay pension contributions via the salary sacrifice method. I recommend you speak to your HR department or the pension scheme administrator, to confirm.
Hope this helps.
Chloe
