Pension Tax Benefits - can someone check my logic here please?

grey_gym_sock

Spiderham wrote: »

I would just add that you need to have 15k (10k+2.5k+2.5k) in the higher rate bracket (ie earnings over about 59k) this year for those numbers to stack up, otherwise you won't get the all the money back from HMRC relating to the 40% tax bracket. Apart from that it seems right though.

it's only £12.5k that you need in the higher rate bracket. it's £12.5k gross income, on which you'd otherwise have paid £5k tax.

... or multiply all figures by N if you're going for a bigger contribution.

Spiderham

Actually I think I've made an error on the sums.

http://www.hmrc.gov.uk/incometax/relief-pension.htm wrote:

You pay Income Tax on your earnings before any pension contribution, but the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot. If you pay tax at higher rate, you can claim the difference through your tax return or by telephoning or writing to HMRC. If you're an additional rate taxpayer you'll have to claim the difference through your tax return.

Now £10k net is £16,666.67 gross at 40% tax. So that would mean £16,666.67 into higher rate tax required.

By my maths this then means
£10k you to pension
£2,500 HMRC to pension
£4,166.67 HMRC to you

Please if I'm wrong someone correct me and explain why.

Therefore assuming £20k net payment and £26k in higher rate and above method it would be:
In higher bracket
£16,640 you to pension
£4,160 HMRC to pension
£5,200 HMRC to you
In basic rate bracket
£3,360 you to pension
£840 HMRC to pension

So in total
£20,000 you to pension
£5,000 HMRC to pension
£5,200 HMRC to you

Hope this makes sense and please anyone who thinks I'm wrong do correct me and let me know my error.

gadgetmind

I've done this a few times and here is how it works.

You send a cheque for £10k to your SIPP provider.
HMRC add 25% on top of this, so £2.5k extra.
You then claim back £2.5k via tax coding or assessment.

So £12.5k has gone into your pension, but you have only paid 60% of this.

12.5 x 0.6 = 7.5 = 10 - 2.5

Your gross payment into a pension is £12.5k and it's this number that represents how far your gross income has to exceed personal allowance + 20% bracket for you to be able to reclaim all of the 40% tax.

(Again, check my numbers!)

grey_gym_sock

Spiderham wrote: »

Now £10k net is £16,666.67 gross at 40% tax. So that would mean £16,666.67 into higher rate tax required.

yes, if want to make a contribution that costs you £10k after all tax relief is applied, it requires £16,666.67 of pre-tax income.

but that's not the same as making a payment into a pension of £10k. because you get money back later on, so the net cost is less than £10k.

if you want a net cost of £10k, you pay in £13,333.33 initially. then HMRC pays £3,333.33 to the pension. then they pay £3,333.33 to you.

By my maths this then means
£10k you to pension
£2,500 HMRC to pension
£4,166.67 HMRC to you

no, the pension fund ends up £12.5k, so that is the pre-tax salary on which you save 40% tax. so the tax saving is £5k, of which £2.5k has been paid to the pension, so there is only £2.5k which HMRC should pay to you.

mickeypops

Thanks everyone for all the advice and for working in the figures. It's clear to me now.

I have around £80K of taxable pay so I'm defintely far enough into the 40% tax rate to be able to put £20K into the SIPP and get full tax relief.

Two final questions guys - I'm over 55 so I can take out a 25% lump sum whenever I like, according to the websites I've been looking at. But surely the IR wouldn't let me withdraw a tax free 25% of the £25K I've just created in the fund with my £20K deposit, after giving me tax relief to create it? Surely there has to be a time lag?

Secondly, I can't see anything to stop me having another SIPP with another provider next year, say, and then repeating the process?

gadgetmind

mickeypops wrote: »

But surely the IR wouldn't let me withdraw a tax free 25% of the £25K I've just created in the fund with my £20K deposit, after giving me tax relief to create it? Surely there has to be a time lag?

You need to read the rules on "pension lump sum recycling". They are complex, and have many corner cases, so I won't try to summarise them here. Note that "intent" comes into things so don't document plans in advance and maintain your online anonymity!

Secondly, I can't see anything to stop me having another SIPP with another provider next year, say, and then repeating the process?

HMRC are ahead of you, and they have set a few traps, but they tend not to be too hard to dodge if you keep your wits about you.

mickeypops

gadgetmind wrote: »

You need to read the rules on "pension lump sum recycling". They are complex, and have many corner cases, so I won't try to summarise them here. Note that "intent" comes into things so don't document plans in advance and maintain your online anonymity!



HMRC are ahead of you, and they have set a few traps, but they tend not to be too hard to dodge if you keep your wits about you.

I've just had a quick read thanks. It isn't something I intend to do, so I'll let it pass for now and give the old brain cells a rest!

zagfles

mickeypops wrote: »

Thanks everyone for all the advice and for working in the figures. It's clear to me now.

I have around £80K of taxable pay so I'm defintely far enough into the 40% tax rate to be able to put £20K into the SIPP and get full tax relief.

Two final questions guys - I'm over 55 so I can take out a 25% lump sum whenever I like, according to the websites I've been looking at. But surely the IR wouldn't let me withdraw a tax free 25% of the £25K I've just created in the fund with my £20K deposit, after giving me tax relief to create it? Surely there has to be a time lag?

Secondly, I can't see anything to stop me having another SIPP with another provider next year, say, and then repeating the process?

I don't see why you'd want to, unless you need the lump sum now, or couldn't afford to put another £20k deposit into your SIPP next year without it. Sounds like that doesn't apply to you.

Debt_Free_Chick

mickeypops wrote: »

I'm in my late fifties, I have a good Defined Benefits pension scheme with my employer.

Be careful putting more money in to a pension plan. Any increase in your DB pension from one year to the next - above a CPI increase - is multiplied by 16. The result counts towards your Annual Allowance, which is a maximum tax-advantaged contribution of £50k.

You may have some unused Allowance from the past three years to use up this year, but this is complex and you should proceed with care.

The 16:1 multiplier for any increase (above CPI) in your DB pension can give a surprising result. It's equivalent to an increase in your DB pension of only £3,125

mickeypops

Debt_Free_Chick wrote: »

Be careful putting more money in to a pension plan. Any increase in your DB pension from one year to the next - above a CPI increase - is multiplied by 16. The result counts towards your Annual Allowance, which is a maximum tax-advantaged contribution of £50k.

You may have some unused Allowance from the past three years to use up this year, but this is complex and you should proceed with care.

The 16:1 multiplier for any increase (above CPI) in your DB pension can give a surprising result. It's equivalent to an increase in your DB pension of only £3,125

Thanks - I've already checked this out. I've benefitted from quite a bump in my DB pension this year, but I'm absolutely fine once I carry forward unused allowances from the previous three years.