Yearly pension contribution limit

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Techhead

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Something I have always wondered. If I reach my yearly pension contribution limit what exactly happens? Do I just lose tax relief on the excess or does the pension company just take what it can and bounces the rest back to my pay Cheque via payroll ? I’m under 40 so would be 20% of salary inc bonus I assume?
 
They would still take the contributions but they wouldn’t attract tax relief in the current year. The relief would carry forward.
 
Thanks Gordon. Is the general consensus to keep contributing past the limit if one can in my bracket ?
 
Partner is a civil servant. Does the limit include all income including year end bonus received through payroll?
 
Gordon Gekko said:
They would still take the contributions but they wouldn’t attract tax relief in the current year. The relief would carry forward.
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How does that work exactly, for an employer scheme?

The more advanced payroll systems, stop relief when the limit is reached, as they have internal controls that check taxable pay and age, and they cross check them against the limits.
So if the limit is surpassed, in the final payroll period of the year, the relief will not carry forward into the following tax year.
 
Techhead said:
Partner is a civil servant. Does the limit include all income including year end bonus received through payroll?
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All pay, subject to PAYE is included, Salary, overtime, bonus, holiday pay and also health insurance BIK, or any other BIK like vehicle BIK, and RSU’s(shares)is included.
 
fayf said:
How does that work exactly, for an employer scheme?

The more advanced payroll systems, stop relief when the limit is reached, as they have internal controls that check taxable pay and age, and they cross check them against the limits.
So if the limit is surpassed, in the final payroll period of the year, the relief will not carry forward into the following tax year.
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You can claim any relief that you're due that isn't given through payroll on a tax return for the year.
 
Techhead said:
Thanks Gordon. Is the general consensus to keep contributing past the limit if one can in my bracket ?
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I think there is a reasonable argument for over contributing. I have done so more than a decade ago.

You get tax free growth.
You get longer time in market
You get the tax relief in the future (although some risk the government could change this in the future)

If your alternative is a taxable investment or not investing it, and you can afford to put the money away for the long term then I think do it.

The percentage that you can contribute increases with age so if you are near one of the are brackets the amount you can get relief on might increase soon.

Generally you will still want to plan on contributing the minimum to get your explorers maximum match in the future.
 
SPC100 said:
I think there is a reasonable argument for over contributing. I have done so more than a decade ago.

You get tax free growth.
You get longer time in market
You get the tax relief in the future (although some risk the government could change this in the future)
Click to expand...
Totally agree, that over payments in excess of the age related limits, made in Jan/Feb/Mar, has been invested for several months before tax relief is clawed back.
 
While this month to month difference is true inside one calendar, I was talking about year on year difference.

e.g. Normally you contribute 5k per year, it was the max you could get relief on. You have a windfall 10k. You contribute the additional 10k now. i.e. 15k in total this year. 10k will not get relief. That 10k of relief carries forward.

You could then stop contributing in some future year and claim the relief, or, your increased age/higher income would allow you to claim the tax relief on the 10k.
 
If you always overcontribute, you never get tax relief because the can always gets kicked down the road.

For what it’s worth, I think this is generally the optimum list of priorities:

1) If relevant the employee contribution required to get the employer contribition
2) 6 months’ household expenditure in cash
3) Maximising your own AVCs and your spouse’s if relevant
4) Overpaying your mortgage
5) Investing personally
 
When you are a few years ahead on the tax relief, you can then change your pension to min contribution to get employer match and then invest personally while claiming the relief.

Tax free growth in pension is a lot nicer than outside pension.
 
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