SIPP tax question

jaynegarner

Can someone clear this one up for me. If the maximum investment that attracts tax relief this year is £225,000. Does that mean I contribute £225K and the govt adds £100K in tax relief or:
Does it mean that I contribute £135K and the govt contributes £90K in tax relief?

wotsthat

I think its the 1st option BUT you have to be earning £225k/ year to be able to get the tax relief on this amount i.e. you can get tax relief on contributions up to 100% of earnings up to a maximum of £225k.

JeremyZerg

"wotsthat" is right - you can only contribute up to 100% of your earnings. Unless you're worth £225k a year, you needn't worry about the tax situation.

But if by any chance you are worth that much, then I'm afraid it's the latter option: the maximum contribution is £225k - tax is resolved afterwards.

To contribute this sum, you'd need to be a higher rate taxpayer. You'd pay 78% of the figure into your SIPP, the SIPP administrators would reclaim 22% from HMRC and you'd reclaim the rest when you fill in your self-assessed tax return.

(The government will then send you the outstanding 18% - so effectively, you've "paid" just £135k.)

ManAtHome

No - if you're earning £225k, you can put the after-tax cash (whatever that is - presumably £135k..?) in, and HMG will top it back up to £225k. Basically, you only get back any tax you would have paid.

dunstonh

There are occasions that it is worth going over 100% income and contributing with no tax relief. Commercial property purchase being the key one. However, for most people, it would be a waste of money.

JeremyZerg

There are occasions that it is worth going over 100% income and contributing with no tax relief. Commercial property purchase being the key one. However, for most people, it would be a waste of money.

As I understood "the rules", you simply cannot contribute anything over 100% of your earnings. For instance, if your salary amounts to £75k per year, it doesn't matter that the annual allowance is in excess of that - you simply can't go above £75k.

You can exceed the annual allowance (currently £225k), if your wages are sufficient - but that's when you get hit for tax.

(I don't know if you were aware - to purchase commercial property, one is actually allowed to borrow within the SIPP product. Your pension can contain a "mortgage"! So it's not always necessary to simply buy the property outright.)

Paul_Herring

JeremyZerg wrote: »

As I understood "the rules", you simply cannot contribute anything over 100% of your earnings. For instance, if your salary amounts to £75k per year, it doesn't matter that the annual allowance is in excess of that - you simply can't go above £75k.

I read them as you get tax relief on 100% of your earnings - anything over that doesn't get a 'rebate'. In your example, if you paid in £100k, you'd get 22% relief on £75k, claim the other 18% on the 40% band on your self assessment, but wouldn't get anything back on the last £25k.

DunstonH?

dunstonh

You can go over 100% of your income but you dont get tax relief on the amount over it.

(I don't know if you were aware - to purchase commercial property, one is actually allowed to borrow within the SIPP product. Your pension can contain a "mortgage"! So it's not always necessary to simply buy the property outright.)

There are limits though so you in some cases, a contribution above the 100% mark may be needed to bring the person within lending criteria.

JeremyZerg

I read them as you get tax relief on 100% of your earnings - anything over that doesn't get a 'rebate'.

[...]

You can go over 100% of your income but you dont get tax relief on the amount over it.

Really? I didn't think so... =S
Perhaps you're right.
I'll bow to the more experienced amongst us!

There are limits though so you in some cases, a contribution above the 100% mark may be needed to bring the person within lending criteria.

Yes, I don't think you can borrow more than 50% of the value of your pension... So, if you had £100,000 in your SIPP, you could only gain an additional £50k. Still a nifty feature, though!

jaynegarner

Thanks everyone