Dumb question - SIPP limit and tax relief

dunroving · 27 January 2015 at 3:01PM

OK, my limited understanding of annual SIPP contribution limits (ignoring carried-over unused previous years, and assuming this is the only pension contribution) are:

Unemployed/no income - limited to £3,600 per year, including tax relief (from MSE: non-workers can pay in £2,880 per tax year, to which the taxman will add £720.)

Employed - maximum of £40k or if earning less, maximum of annual salary.

Here is my question regarding tax relief - do you only get tax relief on income that has been taxed I.e., the amount you paid in tax)? Or also on income that was below the tax threshold?

For example, if a single person earning £20k pays in £16,000, will the HMRC add £4,000 tax relief (even though the person won't have paid £4,000 in tax)?

Similarly, if someone earned £10,000 and paid £8,000 into a SIPP, would HMRC add £2,000 tax relief (even though the person didn't pay any tax?)

I have searched Google for this question (which I must admit I have never considered before) and the descriptions on the various financial pages were less than clear ... I see terms such as the limit is "taxable income" - not sure if this means total income, or income subject to tax (i.e., over the annual allowance threshold).

zagfles · 27 January 2015 at 4:21PM

If it's a RAS scheme (relief at source) eg a personal pension/SIPP then yes you can get tax relief even if you didn't pay tax.

If it's an occupational scheme where conributions are deducted before tax is applied, then you wouldn't get tax relief on contributions which took you under the personal allowance.

Triumph13 · 27 January 2015 at 4:24PM

This goes under the heading 'strange but true'. You can indeed contribute your full earnings, including the bit covered by your personal allowance. I was amazed when I discovered this, but am now making full use of it via my OH contributing most of her salary from her part time job.

xylophone · 27 January 2015 at 4:30PM

A person with no relevant earnings may pay £2880 gross into a pension scheme offering relief at source and the scheme provider will claim tax relief of £720.

With regard to a person whose earnings are below the tax threshold, he may still pay up to the whole of his net earnings into a RAS pension scheme and receive full tax relief.

For example where the earnings are £6K, he can make pension contributions of up to £4,800 net and HMT will add £1,200 to his pension pot and he will pay no tax.

The relief is given by extending the basic rate band rather than by deducting the amount from earnings.

http://www.accountingweb.co.uk/tax-relief-pension-contributions

http://www.pruadviser.co.uk/content/knowledge/technical-centre/tax_relief_members_contributions/

kidmugsy · 27 January 2015 at 4:31PM

Triumph13 wrote: »

This goes under the heading 'strange but true'. You can indeed contribute your full 'taxable income', including the bit covered by your personal allowance. I was amazed when I discovered this, but am now making full use of it via my OH contributing most of her salary from her part time job.

Surely "You can indeed contribute your full earnings" is the case, not your full 'taxable income'. The latter would include existing pensions, rent from a let property, interest on savings, dividends on investments, and a host of other things which are not earnings. It's only the earnings that determine your maximum contribution. But it is just as amazing as you say it is.

Triumph13 · 27 January 2015 at 4:43PM

Thanks Kidmugsy - I've fixed my post. I just hope they don't fix the loophole!

jamesd · 27 January 2015 at 4:49PM

It's not a loophole. It helps to encourage those on lower incomes to make pension contributions. Otherwise the lack of tax relief would give them an incentive not to.

zagfles · 27 January 2015 at 4:51PM

The thing to remember is that money will be taxable on taking it out, so it could well be that basic rate tax is paid on the money later, hence the tax relief now.

Of course it could be within the personal allowance when taking it out, but then so could contributions made by someone paying tax now.

Triumph13 · 27 January 2015 at 5:03PM

jamesd wrote: »

It's not a loophole. It helps to encourage those on lower incomes to make pension contributions. Otherwise the lack of tax relief would give them an incentive not to.

That may be what it's meant for, but it's a loophole the way I'm using it! I'm already using my full AA so I pay the OH her pocket money and she contributes almost all her salary - which will then be taken out tax free in between early retirement and her DB scheme kicking in.
The challenge is how to keep the incentive for the people it's supposed to help whilst stopping sneaky b###ers like me from taking advantage!

dunroving · 27 January 2015 at 6:08PM

zagfles wrote: »

If it's a RAS scheme (relief at source) eg a personal pension/SIPP then yes you can get tax relief even if you didn't pay tax.

If it's an occupational scheme where conributions are deducted before tax is applied, then you wouldn't get tax relief on contributions which took you under the personal allowance.

That's what I was thinking, which is why I started to question myself as it falls under the "Strange But True" category referred to by Triumph13. It's one of those tax things that seems too good to be true or makes you ask yourself "Why didn't I figure that out a long time ago - doh!"

dunroving · 27 January 2015 at 6:16PM

Thanks all, that really helps, and confirms that I am not going bonkers!

It's helpful for me, and also for a friend I have referred to before who is retired and on a state pension and small self-employed income. She often is below the tax threshold so it may make sense for her to put her S-E income into a SIPP.

It's also helpful to have it confirmed that it is (work-related) earnings that determine the limit you can pay into a SIPP and get tax relief on, not other income such as rent, bond income, etc.

Dumb question - SIPP limit and tax relief

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