SIPP, 40% tax relief and income from interest

tsg20

I have what is hopefully a very basic question about 40% tax reliefs and SIPPs. This will be my first year as a higher rate tax payer, and I'm keen to avoid paying 40% tax by putting the money in a SIPP instead. On the other hand, I don't want to put much more into the SIPP than is necessary in order to do this (as I have other shorter term savings goals).

So, I want to check that I've understood correctly what I need to do. I have to make sure that my total pension contributions are at least the amount of my gross pay that is taxed at 40% (I also have a pension via my employer, which goes out of my pre-tax earnings). So, I need to take this total amount, subtract off what goes to my work pension, and then make sure that this amount is in the SIPP.

Now, I think that what I need to do at this point is take that amount and contribute it -20% to the SIPP; the other 20% will then appear automatically in the SIPP within a couple of months, and at the end of the year, I write to HMRC telling them what I've done, and they'll refund me another 20%. Is that right?

My other question is about whether one can avoid paying 40% tax on interest on other savings accounts. Elsewhere on MSE I read that:

"However, you only get the tax relief on earned income"

So, does this mean that there is no way to avoid the 40% on other savings?

richbeth

Hi,
I'd look at it this way.
1) get personal allowance from tax code - std for 2012/13 is £8,105
2) deduct this from gross salary (exc employer contributions) to give taxable pay
3) deduct 20 % tax band from this (£34,370) to give amount taxable at 40 %

so salary of £45k less £8,105 less £34370 = £2,525 at 40 % so you need to pay ca £210 pm to maximise tax relief on your income.

Interest is a slight complicating factor and someone may want to confirm that I have this correct but if you have £120 interest pa I'd just pay another £10pm in pension contributions, so a total of £220pm.

Re the inland revenue, write to them immediately saying you expect to pay pension payments of £x in 2012/13 and £y in future years. They should then adjust your tax code so you get the 'extra' 20 % back.

Regards,
Richard

Linton

tsg20 wrote: »

I have what is hopefully a very basic question about 40% tax reliefs and SIPPs. This will be my first year as a higher rate tax payer, and I'm keen to avoid paying 40% tax by putting the money in a SIPP instead. On the other hand, I don't want to put much more into the SIPP than is necessary in order to do this (as I have other shorter term savings goals).

So, I want to check that I've understood correctly what I need to do. I have to make sure that my total pension contributions are at least the amount of my gross pay that is taxed at 40% (I also have a pension via my employer, which goes out of my pre-tax earnings). So, I need to take this total amount, subtract off what goes to my work pension, and then make sure that this amount is in the SIPP.

Now, I think that what I need to do at this point is take that amount and contribute it -20% to the SIPP; the other 20% will then appear automatically in the SIPP within a couple of months, and at the end of the year, I write to HMRC telling them what I've done, and they'll refund me another 20%. Is that right?

My other question is about whether one can avoid paying 40% tax on interest on other savings accounts. Elsewhere on MSE I read that:

"However, you only get the tax relief on earned income"

So, does this mean that there is no way to avoid the 40% on other savings?

Your understanding of the process is correct. Whether you are a higher rate tax payer is determined from your total income from savings and earnings (and some other things). So if you reduce you total income below the 40% tax threshold you will not pay higher rate tax on anything. It may be of interest that dividend income from shares is tax free for standard rate tax payers, and so you can avoid any tax on them by making sufficient pension payments.

MSE's tax relief statement really means that if you pay into a pension out of savings interest you dont get the tax relief. But in your case you would be paying for all the pension out of earned income so its not an issue.

thenudeone

Your pension provider will only ever reclaim basic rate tax. So if you contribute £800, they will reclaim £200 and your gross contribution is £1000. You pension will never get any more money.

When you submit your tax return, you'll receive the extra £200:
amount paid by cheque £1000 x (100%-20%)
LESS
what the net cost should be £1000 x (100%-40%)
so the final net cost isn't the value of the cheque you wrote.

When your tax is calculated, the gross contribution number is the one which will be deducted from your gross salary before any taxes are calculated.
[In practice on the tax calculation they add the gross contribution to the existing basic rate band so that more of your income is taxed at 20% and less at 40%, but the effect is the same.]

Effectively you overpay the pension by 20% of the gross contribution (not 20% of the net contribution)

This might explain it better:http://forum.moneysavingexpert.com/showthread.php?t=3867163

I can't comment on the savings interest

CLAPTON

1. you need to take your gross pay
2. then deduct your occupational pension contributions
3. then add back your grossed up savings interest (i.e. if you actually receive 100 then grossed up will be 100/80% i.e. 125) (obviously excluding ISA interest)
4. then add back grossed up dividend payments (excluding ISA divis)

5. then determine how much over 42,475 you are over that will be taxed at 40% call this Y

6. then pay Y x 80% into your SIPP
7. then claim back the 20% tax from HMRC (Yx20%)

tsg20

OK, great! Thanks everyone, this all seems pretty clear now.