Can somebody check my maths please Sipp/drawdown and tax credits
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happyhero
Posts: 1,276 Forumite
I just received a much reduced tax credits update and so looked to sort it out somehow. I also just found out….luckily for us…. that I can offset any private personal pension contributions against income to increase our tax credit payments.
Last year at 56 I started getting more involved with my Sipp, drawdown and recycling. I am a non-tax payer and my wife’s (55) income is about £10,500 every year.
An important point here, I am trying to utilise my personal allowance while I am a non-tax payer to take as much of my SIPP tax free as I can and I am considering moving another pension into my SIPP to access the money in the same way, but not to live off for now, but to reinvest for now. Last year I took £9950 from my SIPP via drawdown and claimed the tax back. I also paid into a Sipp for my wife £9612 gross.
The £9950 I withdrew effectively damaged our child tax credits by £300 per month approx. hence the new poor tax credits update we just received, but offsetting this with the £9612 contribution more or less eliminates this effect. So I’ve just tried to add this information as I was not aware of this before.
We get full Child tax credits but the Working tax credits were £177.78 before the reduction per 4 weeks. The potential top figure for this is £305.48 per 4 weeks
Now obviously I can’t effect last year any further with pension contributions so I am thinking for this and future years, assuming figures stay the same and adjusting as necessary. Hargreaves Lansdown who we use for our Sipps say you can contribute beyond your salary amount but you must state when you contribute that it is a gross payment that will not attract tax relief.
So if I add about £3250 gross meaning I have added £13,750 to my wife’s Sipp and enter that on the Tax credits form as it asks for total gross contribution we will receive the maximum £305.48 per 4 weeks according to the Gov.uk calculator increasing our tax credits payments by £1,660.10 per year.
Now looking at the Sipp I can take £812.50 of the £3,250 tax free (25%) then £2437.50 will be taxed at 20% whenever we take it (ignoring any investment growth for ease here) so I will lose £487.50 in tax.
So £1,660.10 - £487.50 = £1,172.60 improved income.
Do you agree and am I missing anything?
I was reluctant to add money gross to my wife’s Sipp due to the 20% tax and thought the money would be better off in a ISA with HL which we have but as the calculations show it improves our tax credits enough to make it worthwhile it appears….if I’ve worked this out correctly.
Last year at 56 I started getting more involved with my Sipp, drawdown and recycling. I am a non-tax payer and my wife’s (55) income is about £10,500 every year.
An important point here, I am trying to utilise my personal allowance while I am a non-tax payer to take as much of my SIPP tax free as I can and I am considering moving another pension into my SIPP to access the money in the same way, but not to live off for now, but to reinvest for now. Last year I took £9950 from my SIPP via drawdown and claimed the tax back. I also paid into a Sipp for my wife £9612 gross.
The £9950 I withdrew effectively damaged our child tax credits by £300 per month approx. hence the new poor tax credits update we just received, but offsetting this with the £9612 contribution more or less eliminates this effect. So I’ve just tried to add this information as I was not aware of this before.
We get full Child tax credits but the Working tax credits were £177.78 before the reduction per 4 weeks. The potential top figure for this is £305.48 per 4 weeks
Now obviously I can’t effect last year any further with pension contributions so I am thinking for this and future years, assuming figures stay the same and adjusting as necessary. Hargreaves Lansdown who we use for our Sipps say you can contribute beyond your salary amount but you must state when you contribute that it is a gross payment that will not attract tax relief.
So if I add about £3250 gross meaning I have added £13,750 to my wife’s Sipp and enter that on the Tax credits form as it asks for total gross contribution we will receive the maximum £305.48 per 4 weeks according to the Gov.uk calculator increasing our tax credits payments by £1,660.10 per year.
Now looking at the Sipp I can take £812.50 of the £3,250 tax free (25%) then £2437.50 will be taxed at 20% whenever we take it (ignoring any investment growth for ease here) so I will lose £487.50 in tax.
So £1,660.10 - £487.50 = £1,172.60 improved income.
Do you agree and am I missing anything?
I was reluctant to add money gross to my wife’s Sipp due to the 20% tax and thought the money would be better off in a ISA with HL which we have but as the calculations show it improves our tax credits enough to make it worthwhile it appears….if I’ve worked this out correctly.
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Comments
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A sense of shame?
I don’t get why you say that, I fear you are making assumptions when you are not aware of all the facts, we are on low income but have some investments so we live pretty meagrely but have the ability to utilise our savings which we are very protective of as they will not give us a large pension as they stand.
We were advised by several different organisations to make the most of any benefits we can to supplement our low income. Such as putting money into ISA’s and not paying tax on the interest, putting money into Sipps to receive the tax relief and thus increase our Sipp, are these not all tax avoidance or similar matters.
Am I missing something are these not things that everybody does to give themselves an advantage over what they already have. And is this site not about exploiting these advantages whenever they appear to better our personal circumstances. They often call people fools for not claiming everything that is available to them.
Have I been too clever with this or something and upset you, it’s there for all to use and there are limits in place to protect the system as someone who is rich might try to do.
You don’t know us and so it would be impossible for you to correctly judge us, for we live like we do due to a series of life events as everyone does, but I do not offer all this information here as it is not necessary for the purpose of this post.
We are not rich by any means and I am simply doing what the HMRC rep explained to me to do, although I didn’t fully understand it at the time, so that my wife and I and my 2 young kids can live with a little bit less struggle,…. and we will still struggle but just a little less hopefully.
I think you should concentrate on the system abusers who exaggerate and lie to achieve gains I am simply employing the system using our actual legitimate details as advised by an HMRC advisor.
Also as an aside point what is the purpose of the deductions part of the Tax credits form entitled Personal Pension Contributions if not to use this feature they offer?
If they were not happy for someone to use this would they not have left it off the form?
Nope, I don't get it, you're going to have to tell me what I am doing wrong.0 -
I'm not sure if non tax relievable pension conts are deductible for tax credits. What I've read seems to imply they are, but it's not something I'd like to test. You need to be sure on this point, because you need to manually deduct the pension conts from the income you declare, and they will almost certainly pick up on this, and it can be hard enough when you've got normal tax relievable pension conts! They almost accuse you of fraud and you have to prove otherwise, so make sure your numbers are right!
Try the benefits board, be prepared for some flack, hope from an answer from Icequeen99.
But one glaring thing you seem to be missing is there's a £2500 disregard for income changes from one year to the next. So if this year's income is £3250 less than last year's (after all deductions etc), you'll be assessed on this year's plus £2500. So won't make the difference you seem to be thinking.0 -
But one glaring thing you seem to be missing is there's a £2500 disregard for income changes from one year to the next. So if this year's income is £3250 less than last year's (after all deductions etc), you'll be assessed on this year's plus £2500. So won't make the difference you seem to be thinking.
Thank you zagfles, I'm struggling to understand this bit would you kindly elaborate on it for me please, sorry for being a bit thick here?0 -
Say your income for tax credits purposes last year was £10,000.Thank you zagfles, I'm struggling to understand this bit would you kindly elaborate on it for me please, sorry for being a bit thick here?
Your tax credits this year will also be based on £10,000 unless your income changes by more than £2500. If it does the first £2500 of change is ignored.
So if your income this year is in the range £7500-£12500, your tax credits will be based on £10,000.
If your income is below £7500 your tax credits will be based on your income this year plus £2500 (the first £2500 decrease is disregarded). So if it's £7000, your tax credits will be based on an income of £9500.
If your income is over £12500 your tax credits will be based on your income this year minus £2500 (the first £2500 increase is disregarded).0 -
Say your income for tax credits purposes last year was £10,000.
Your tax credits this year will also be based on £10,000 unless your income changes by more than £2500. If it does the first £2500 of change is ignored.
So if your income this year is in the range £7500-£12500, your tax credits will be based on £10,000.
If your income is below £7500 your tax credits will be based on your income this year plus £2500 (the first £2500 decrease is disregarded). So if it's £7000, your tax credits will be based on an income of £9500.
If your income is over £12500 your tax credits will be based on your income this year minus £2500 (the first £2500 increase is disregarded).
Thank very much for this zagfles, I understand now, but oh my god, why do they do this?
Should they not base everything on actual figures rather than them just moving the goal posts. Does it give a reason anywhere what the thinking behind this is?
This seems to work in my favour or am I getting mixed up, ie so I increased our income this year by 9950 but they will disregard £2,500 and call it an increase of £7450 instead?
Does it all work itself out later somehow?
On the Gov.uk Calculator what figure do you suggest I use the £9950 or do I take the £2500 off (the calculator is used anonoumously so you can play with it)?0 -
It's supposedly to avoid overpayments. This was a big political problem 10 years ago - New Labour's solution to which was to have a massive disregard - £25k, and it only applied to income increases not falls! So there was an obvious loophole - make large pension contributions in alternate years and get the pension contribution almost free! So earn £35k - contribte £25k in alternate years, and every year tax credits will be based on an income of £10k! Accountants were recommending it!Thank very much for this zagfles, I understand now, but oh my god, why do they do this?
Should they not base everything on actual figures rather than them just moving the goal posts. Does it give a reason anywhere what the thinking behind this is?
Unfortunately them nasty Tories put a stop to all this and gradually reduced the disregard to £2500 and applied it to falls as well as rises, putting a stop to that loophole!
Yes if income rises they'll ignore the first £2500 of the rise. But I thought your income last year was around £10k (wife income plus your pension drawdown minus wife's pension conts?) and your were looking at lowering it this year to about £6500?This seems to work in my favour or am I getting mixed up, ie so I increased our income this year by 9950 but they will disregard £2,500 and call it an increase of £7450 instead?
Usually it just delays things ie any rise or fall is accounted for a year late, but in some cases it doesn't, depends on particular circumstances.Does it all work itself out later somehow?
It should ask for both last year's and this year's income - if it doesn't try the entitledto/turn2us calculator which I think do.On the Gov.uk Calculator what figure do you suggest I use the £9950 or do I take the £2500 off (the calculator is used anonoumously so you can play with it)?0
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