Question on using SIPP to reduce tax

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marcusjames
marcusjames Posts: 77 Forumite
in Cutting tax
I'm a little confused if SIPP contributions as recorded as gross or net when calculating income tax.


For example, an employee earns £110,000 and wants to use SIPP contributions to keep salary below £100,000.


The pension provider will "gross-up" contributions by 20%. So should they make a contribution of £8,000 or £10,000?


My head says £8,000 but I'm reading some conflicting reports.


Many thanks.

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  • Dazed_and_confused
    Dazed_and_confused Posts: 6,458 Forumite
    Uniform Washer
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    It is the gross contribution which counts. £8,000 you pay into a SIPP is a £10,000 gross contribution.

    But payments into a SIPP won't change your taxable income at all. (Taxable) income from employment of £110,000 doesn't get reduced to £100,000 just because of a payment into a SIPP.

    Salary is really irrelevant for tax purposes, taxable pay, which is usually itemised on payslips is what matters (for employment income).

    Assuming you are trying to retain your Personal Allowance then you need to Google "adjusted net income" as this sets out how your Personal Allowance is calculated.
  • marcusjames
    marcusjames Posts: 77 Forumite
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    Thanks for the response. I had read about adjusted net income but it appeared to include SIPP contributions in the calculation.


    Are you saying that SIPP contributions won't help me retain the personal allowance?
  • Dazed_and_confused
    Dazed_and_confused Posts: 6,458 Forumite
    Uniform Washer
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    No, SIPP payments are relevant for adjusted net income but this is calculation used purely for establishing the amount of your Personal Allowance (and one or two other things I think).

    If your P60 showed taxable pay of £110,000 and you made a SIPP payment (gross amount) of £10,000 your taxable income would still be £110,000.

    If you had no other taxable income you would retain your Personal Allowance but are taxed on £110,000 (less Personal Allowance).

    The SIPP payment does however increase the amount of the basic rate (20%) tax band by £10,000 and as a result reduces the amount of 40% tax you would have to pay.

    But your taxable income is still £110,000.
  • xylophone
    xylophone Posts: 44,427 Forumite
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    Try here

    http://www.hl.co.uk/pensions/sipp/how-much-can-i-invest

    You can download the guide in the link.
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