40% Taxpayer - SIPP To Reduce

Toki

Hi,

I've just got my P60 in, details below.

Tax Code - 932L
Total Pay for tax year to 5 April 2012 - £53,191.70

By my calculations, £8,862.70 (£53,191.70 - 9329 - 35000) of my pay has been taxed at 40% giving £3,545,08 paid in tax.

I am looking to pay money into a SIPP to reduce or eliminate this. Am I right in saying I would need to pay in £8,862.70 into a SIPP to get the full benefit of the higher rate tax being paid into my SIPP? Are there any benefits of remaining a 40% taxpayer or should I pay the full amount into the SIPP?

I don't currently fill in a self assessment either. My tax code is higher due to me paying in 10% of my wage into my work pension, I notified HMRC who adjusted accordingly. My pension is counted as a deduction on my payslip.

Would I inform HMRC via letter once the SIPP is open and payment made to reclaim the additional tax relief?

I also plan to do this for this tax year so we can contiue to receive child benefit from January and keep me under the £50k threshold.

Feel free to ask if you need any more information. Thanks.

Thanks in advance.

jem16

Toki wrote: »

Am I right in saying I would need to pay in £8,862.70 into a SIPP to get the full benefit of the higher rate tax being paid into my SIPP?

That's correct.

Are there any benefits of remaining a 40% taxpayer or should I pay the full amount into the SIPP?

No benefits and only disadvantages such as the loss of child benefit.

I don't currently fill in a self assessment either. My tax code is higher due to me paying in 10% of my wage into my work pension, I notified HMRC who adjusted accordingly. My pension is counted as a deduction on my payslip.

Would I inform HMRC via letter once the SIPP is open and payment made to reclaim the additional tax relief?

Yes.

ceeforcat

Actually, while jem16 is absolutely correct, a GROSS contribution is required of £8862, not net. You contribute £7089, HMRC make this up to £8862. An additional £1773 tax relief is obtained through your tax return.

jem16

ceeforcat wrote: »

Actually, while jem16 is absolutely correct, a GROSS contribution is required of £8862, not net. You contribute £7089, HMRC make this up to £8862. An additional £1773 tax relief is obtained through your tax return.

You're correct - should have made this more obvious in case the OP was not aware.

Toki

Thanks jem16 and ceeforcat.

I've been reading up more about this. Correct me if I'm wrong, but if I want on overall gross contribution of £8862, would I not have to pay 60% of the gross amount? So I would pay £5317 in and would automatically receive the 20% tax relief of £1772 and could then claim back the additional 20% relief by writing a letter to HMRC?

See link below where I typed in gross amount of £8862. This would make sense to me as I have paid £3545 in tax already which is £1772 x 2 in example above.

Am I right?

One other question, the 2011-2012 tax year is over now obviously, can I retrospectively claim this amount back or would I have to have done this before April 5th of this year? Basically am I too late to do this? Thanks

http://www.hl.co.uk/pensions/sipp/tax-relief-calculator

CLAPTON

no if you make a contribution of 5317 then that is grossed up by your pension company to 6646 i.e. a extra HMRC contribution of 1329.25
you then claim 20% of 6646 back from HMRC i.e. amn extra 1329.25

however you will still be paying some 40% tax

so you need to contribute 7089.6 which is grossed up to 8862

you than claim the extra 20% back ie. 20% of 8862 = 1772.4

Toki

CLAPTON wrote: »

no if you make a contribution of 5317 then that is grossed up by your pension company to 6646 i.e. a extra HMRC contribution of 1329.25
you then claim 20% of 6646 back from HMRC i.e. amn extra 1329.25

however you will still be paying some 40% tax

so you need to contribute 7089.6 which is grossed up to 8862

you than claim the extra 20% back ie. 20% of 8862 = 1772.4

Okay, yes that does make sense now. Thanks to you all.

Toki

CLAPTON wrote: »

no if you make a contribution of 5317 then that is grossed up by your pension company to 6646 i.e. a extra HMRC contribution of 1329.25
you then claim 20% of 6646 back from HMRC i.e. amn extra 1329.25

however you will still be paying some 40% tax

so you need to contribute 7089.6 which is grossed up to 8862

you than claim the extra 20% back ie. 20% of 8862 = 1772.4

Are you sure that's right? Taking the simple example of paying in £100 gross and being a 40% taxpayer, would only require £60 from me. I would receive the additional 25% (which equals 20% tax on the gross amount of £75 if that makes sense) which would equal £15. Then the extra £25 would come in from the tax return or letter to HMRC. In effect is 41.66666% of the £60 is claimed back.

If that is correct, I would pay in £7089, then receive £1773 tax relief automatically and claim an additional £2953 for being a 40% taxpayer.

Is that correct?

The calculator below splits it evenly as £2363 for 20% relief and another £2363 for 40% relief. Not sure if the way I worked it out above is correct or HL calc is way it works. Either way, I contribute £7089 and receive £11815.

http://www.hl.co.uk/pensions/sipp/tax-relief-calculator

CLAPTON

the way it works is as follows

-you actaully give some money to the pension provider lets say £100
-the pension provider claims the 20% of the gross amount i.e.
grosses it up to 100/80% i.e. to 125

-so £125 is the gross amount sitting in your pension fund

-if you are a 20% tax payer then there is nothing to do as you already have the 20% discount i.e. you have only paid 80% of 125 = 100

-however if you are a 40% taxpayer then you are entitled to only pay 60% of the gross amount i.e. you only need to pay 60% of 125 i.e. £75
however you already have the first 25 so you then claim the next 25 from HMRC directly

jem16

Toki wrote: »

Are you sure that's right?

Clapton gave you the correct answer.

You must always think of gross when contributing to a pension, not net.

If that is correct, I would pay in £7089, then receive £1773 tax relief automatically and claim an additional £2953 for being a 40% taxpayer.

Is that correct?

No it's not correct.

The calculator below splits it evenly as £2363 for 20% relief and another £2363 for 40% relief. Not sure if the way I worked it out above is correct or HL calc is way it works.

The calculator is correct. It's an even split. 20% via the provider and 20% directly from HMRC.

Either way, I contribute £7089 and receive £11815.

No you don't. If you contribute £7089, your pension will actually receive £8861.25.

You will then get a cash refund of £1772.25. This will not go into your pension.

Toki

Thanks jem16 and clapton again. I was getting mixed up by net and gross and all sorts. When I read it again it makes sense, sorry for being so thick! I only want to contribute £8862 gross as you rightly say. I'll blame it on having no sleep due to a week old baby!

Appreciate your help.