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    • fcjf
    • By fcjf 9th Sep 17, 12:46 PM
    • 44Posts
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    fcjf
    Max Pension Contributions to receive 40% tax relief
    • #1
    • 9th Sep 17, 12:46 PM
    Max Pension Contributions to receive 40% tax relief 9th Sep 17 at 12:46 PM
    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?
Page 1
    • Dazed and confused
    • By Dazed and confused 9th Sep 17, 1:44 PM
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    Dazed and confused
    • #2
    • 9th Sep 17, 1:44 PM
    • #2
    • 9th Sep 17, 1:44 PM
    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
    • By fcjf 9th Sep 17, 3:15 PM
    • 44 Posts
    • 1 Thanks
    fcjf
    • #3
    • 9th Sep 17, 3:15 PM
    • #3
    • 9th Sep 17, 3:15 PM
    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
    • By zagfles 9th Sep 17, 3:30 PM
    • 12,263 Posts
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    zagfles
    • #4
    • 9th Sep 17, 3:30 PM
    • #4
    • 9th Sep 17, 3:30 PM
    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?
    Originally posted by fcjf
    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
    • By Dazed and confused 9th Sep 17, 3:34 PM
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    Dazed and confused
    • #5
    • 9th Sep 17, 3:34 PM
    • #5
    • 9th Sep 17, 3:34 PM
    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
    • By Paul_Herring 9th Sep 17, 4:04 PM
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    Paul_Herring
    • #6
    • 9th Sep 17, 4:04 PM
    • #6
    • 9th Sep 17, 4:04 PM
    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.
    Originally posted by fcjf
    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.
    Conjugating the verb 'to be":
    o I am humble
    o You are attention seeking
    o She is Nadine Dorries
    • zagfles
    • By zagfles 9th Sep 17, 4:14 PM
    • 12,263 Posts
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    zagfles
    • #7
    • 9th Sep 17, 4:14 PM
    • #7
    • 9th Sep 17, 4:14 PM
    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.
    Originally posted by Paul_Herring
    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
    • By fcjf 9th Sep 17, 6:28 PM
    • 44 Posts
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    fcjf
    • #8
    • 9th Sep 17, 6:28 PM
    • #8
    • 9th Sep 17, 6:28 PM
    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
    • By Dazed and confused 9th Sep 17, 6:39 PM
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    Dazed and confused
    • #9
    • 9th Sep 17, 6:39 PM
    • #9
    • 9th Sep 17, 6:39 PM
    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
    • By michaels 9th Sep 17, 7:16 PM
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    michaels
    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.
    Cool heads and compromise
    • Dansmam
    • By Dansmam 10th Sep 17, 7:34 AM
    • 515 Posts
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    Dansmam
    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.
    • bigadaj
    • By bigadaj 10th Sep 17, 7:43 AM
    • 10,012 Posts
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    bigadaj
    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.
    Originally posted by Dansmam
    You can only use the current years income, if this exceeds £40000 then you can use carry forward from unused allowance from the three previous tax years. You use the spare allowance from oldest to newest years.
    • zagfles
    • By zagfles 10th Sep 17, 10:36 AM
    • 12,263 Posts
    • 10,204 Thanks
    zagfles
    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.



    So the above calculation stands and the additional BTL income isn't relevant for higher rate tax relief through Pension contributions, seems unfair.
    Originally posted by fcjf
    You're getting confused. Firstly ignore the stuff about "relevant earnings". You're nowhere near the limit for that. You have relevant earnings of £59k and are only looking at putting in £22k or so. So it's not an issue.

    The tax calculation uses all your taxable income.

    So you can get 40% tax relief on £22k gross contribution into a SIPP (ie £17600 net). If you contribute £22k to a SIPP, then your basic rate tax band will be increased by £22k to £55,500, plus the PA of £11500, means your £67k income will not enter the HRT band.

    There is some new rule about mortgage interest on BTL's not being fully deductible but I'm sure you've accounted for that.
    • fcjf
    • By fcjf 10th Sep 17, 2:15 PM
    • 44 Posts
    • 1 Thanks
    fcjf
    You're getting confused. Firstly ignore the stuff about "relevant earnings". You're nowhere near the limit for that. You have relevant earnings of £59k and are only looking at putting in £22k or so. So it's not an issue.

    The tax calculation uses all your taxable income.

    So you can get 40% tax relief on £22k gross contribution into a SIPP (ie £17600 net). If you contribute £22k to a SIPP, then your basic rate tax band will be increased by £22k to £55,500, plus the PA of £11500, means your £67k income will not enter the HRT band.
    That's what I wanted to hear! I also recall reading somewhere that taxable benefit in kind amounts are added to relevant earning so I could add my car and private health to the 59k if required but sounds like it isn't if I want to pay £17,600 into the SIPP.

    There is some new rule about mortgage interest on BTL's not being fully deductible but I'm sure you've accounted for that.
    Yes I have accounted for this.
    • fcjf
    • By fcjf 10th Sep 17, 2:20 PM
    • 44 Posts
    • 1 Thanks
    fcjf
    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
    My employer doesn't give me any of the NI saving and I don't want to pay any additional payments into my work pension for a number of reasons, they won't contribute any more than the current 17% which is very generous anyway, they don't offer any early access or drawdown so couldn't take out the 25% at 55 which I want to do and the funds options for the DC pension aren't great so I'd prefer to keep loading up the SIPP.
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