Max Pension Contributions to receive 40% tax relief

fcjf · 9 September 2017 at 12:46PM

I have a two Endowment policies which will be maturing in the next 4-8 months which will give me in the region of £40,000. I will approx. £20,000 in Nov 17 and £20,000 in May 18. I changed my mortgage to repayment a long time ago and whilst I could use the £40,000 to pay off a large chunk of the Mortgage I am going to put this money into my SIPP.

I am 48, salary of £64,000, I pay 8% into my work pension using salary sacrifice and my employer pays 17%, so a total of £16,000 going into my DC Pension.

I don’t want to leave it until the next tax year and use carry forward and would prefer to top up this years and next year’s allowance (assuming the tax rules don’t change) but I just want to double check that I am gaining maximum tax relief.

So from the £40,000 annual allowance I will be contributing £16,000 into my work DC pension which leaves me £24,000. If I pay £19,200 this year, £4,800 will be added for 20% tax relief to make up the £40,000, is this correct? Will I still be able to claim back a further £4,800 to get the full 40% relief? I’m getting confused as I would have made £40,000 pension contributions whilst only having a salary of £19,000 in the 40% tax bracket. What am I missing?

Dazed_and_confused · 9 September 2017 at 1:44PM

You can only get 40% tax relief to the extent that you have actually paid 40% tax.

Salary is irrelevant for this, it is total taxable income, which for your employment should be shown on your payslip and will be on your P60.

You will need to consider the conflict between maximising tax relief and maximising contributions into your SIPP

fcjf · 9 September 2017 at 3:15PM

Salary is irrelevant for this, it is total taxable income, which for your employment should be shown on your payslip and will be on your P60.

OK thank you. My payslip has basic pay and gross pay, the gross pay being basic pay minus my pension contributions. This is adding up to approx £59,000 for this year assuming all payments remain as at present. I also expect to have net profits from BTL's of another £8,000 so would have a total of £67,000 taxable income. How much can I pay into my SIPP to obtain the full 40% tax relief? Is this 67,000 - 45,000 = 22,000 so I can make a payment £13,200 and 20% is added within the SIPP (£4,400) and I claim another of 20% (£4,400) of in my Self Assessment?

zagfles · 9 September 2017 at 3:30PM

fcjf wrote: »

OK thank you. My payslip has basic pay and gross pay, the gross pay being basic pay minus my pension contributions. This is adding up to approx £59,000 for this year assuming all payments remain as at present. I also expect to have net profits from BTL's of another £8,000 so would have a total of £67,000 taxable income. How much can I pay into my SIPP to obtain the full 40% tax relief? Is this 67,000 - 45,000 = 22,000 so I can make a payment £13,200 and 20% is added within the SIPP (£4,400) and I claim another of 20% (£4,400) of in my Self Assessment?

No you pay 80% of the required gross amount into your SIPP. So if you want to put £22k in, you pay £17600, the SIPP reclaims £4400, that goes into the SIPP making £22k total, and you'll get £4400 back through SA/PAYE code - that goes to you not the SIPP.

Dazed_and_confused · 9 September 2017 at 3:34PM

The gross contribution (your actual payment plus the basic rate tax relief the provider adds to your pension pot) increases the amount you can pay basic rate tax on.

So (outside of Scotland) if you paid £16,000 into a SIPP this becomes £20,000 gross contribution.

Your basic rate threshold is then increased by £20,000 from £45,000 to £65,000 (including the standard personal allowance) so if you have sufficient income you pay tax on £53,500 at 20% instead of £33,500 at 20% and £20,000 at 40%.

Paul_Herring · 9 September 2017 at 4:04PM

fcjf wrote: »

This is adding up to approx £59,000 for this year assuming all payments remain as at present. I also expect to have net profits from BTL's of another £8,000 so would have a total of £67,000 taxable income.

While your BTL income may be taxable, it is not considered relevant UK earnings (i.e. you won't get any tax relief on them, even though you paid tax), so you can't use that £8k in your pension contribution calculations.

zagfles · 9 September 2017 at 4:14PM

Paul_Herring wrote: »

While your BTL income may be taxable, it is not considered relevant UK earnings (i.e. you won't get any tax relief on them, even though you paid tax), so you can't use that £8k in your pension contribution calculations.

The OP appears to want to get max higher rate tax relief. In which case all taxable income should be included in the calculation. Making sure that the amount is within his relevant earnings, which from above it is, easily. Net relevant earnings about £59k, he's taking about contributing £22k.

fcjf · 9 September 2017 at 6:28PM

The gross contribution (your actual payment plus the basic rate tax relief the provider adds to your pension pot) increases the amount you can pay basic rate tax on.

So (outside of Scotland) if you paid £16,000 into a SIPP this becomes £20,000 gross contribution.

Your basic rate threshold is then increased by £20,000 from £45,000 to £65,000 (including the standard personal allowance) so if you have sufficient income you pay tax on £53,500 at 20% instead of £33,500 at 20% and £20,000 at 40%.

So I'm getting there step by step. My understanding is;
Relevant earnings £59,000 - personal allowance of £11,500 = £47,500.
Deduct 20% tax band of £33,500 = £14,000
I make a SIPP payment of £11,200 this is grossed up to £14,000.
This is the max I can pay in to the SIPP and receive the extra 40% tax relief any SIPP contributions over and above £11,200 would only receive 20% relief.

While your BTL income may be taxable, it is not considered relevant UK earnings (i.e. you won't get any tax relief on them, even though you paid tax), so you can't use that £8k in your pension contribution calculations

So the above calculation stands and the additional BTL income isn't relevant for higher rate tax relief through Pension contributions, seems unfair.

Dazed_and_confused · 9 September 2017 at 6:39PM

If relevant earnings are £59,000 then is there any reason you couldn't pay £17,600 making gross contribution of £22,000?

If you complete a self assessment tax return why not have a play around with your 2016:17 return (without sending it to HMRC of course

) and see how different contributions affect your liability.

michaels · 9 September 2017 at 7:16PM

How would it work if instead the op increased their sal sac amount? SO that earned income plus rental income = 45k?

OP does your employer give you any of the employer NI saving of 13.8% if you do sal sac? Even without this you avoid the 2% NI payable on income above 45k.

Dansmam · 10 September 2017 at 7:34AM

I'm only just getting my head around this pension malarkey myself but others on here will be able to tell you whether you can also go back and maximise previous years. I think you might be able to go back 2.

Max Pension Contributions to receive 40% tax relief

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