SIPP Tax relief- claiming the extra 20%

FacingMe

Hi

I have a question on how HMRC pay tax relief on SIPPs to higher rate tax payers, since my research and HMRC provided different answers.

I pay income tax at 40% and started a SIPP earlier this year, in addition to my occupational pension. I contribute irregular amounts, as and when I have free funds. The SIPP administrator claims 20% tax relief on my behalf and pays it directly into my SIPP account. It is up to me to claim the additional 20% (to get to my 40% tax rate) directly from HMRC.

I researched how to do this and found the following: At tax year end I tell HMRC how much I've paid into the SIPP (either by self assessment or by calling them - for me it will be calling them, since I don't self assess). HMRC then send me a cheque, which I can use to top up my SIPP.

I wanted to confirm this so called HMRC (0845-300-0627) and was told that they do not pay relief in one-off amounts. If I called them at tax year end and told them how much I plan to pay into the SIPP for NEXT year, then they would adjust my tax code. That means, instead of a single amount I can then pay into my SIPP, I will get 1/12 of that every month by virtue of a reduced tax deduction in my payslip.

Does the advice I received sound correct?

Thanks

dunstonh

Adjustment of tax code is the normal method you would expect for pension tax relief.

jamesd

Adjustment of tax code by giving them an estimate each year is the normal way. For the initial year they would also adjust the tax code to give you the tax relief for that year. They will want to know the amount paid in to the pension pot after the 25% for basic rate tax relief has been added, though no harm to tell them that as well as the net amount.

If you pay in £8,000, 25% is added to that to get to £10,000. That £2,000 is 20% of the £10,000. So 25% added to net or 20% deducted from gross, depends which direction you're looking at the percentage from.

FacingMe

Thanks guys.

Jamesd, is the basic relief not 20%?

Linton

FacingMe wrote: »

Thanks guys.

Jamesd, is the basic relief not 20%?

20% is taken off gross to give net - this means that 25% is added to net to give gross.

redbuzzard

Yes it's 20%. To be clear -

If for example you wanted to put £10,000 in your SIPP, you would pay in £8,000, and the SIPP provider would credit £2,000.

Provided you have enough income on which you've pad the higher rate of 40% tax, you can get the additional £2,000 back in tax relief.

Whether you get your tax code adjusted is really neither here nor there - that only affects what is deducted via PAYE. You will have to put your SIPP contributions on your tax return to get the relief (or keep it, if you have had your tax code adjusted).

This is from experience. I didn't even know that I could get my tax code adjusted until recently when they did it for me unasked.

Hope that helps.

Deneb

I wrote to them recently to tell them how much my contributions were for this year - first year of paying into a SIPP. They have adjusted my 2012-13 tax code accordingly, so I suspect I will get a rebate in my pay at the end of the month.

They also adjusted my 2013-14 tax code to accord with pension contributions being made up to my HRT threshold - must have assumed that is my intention as I didn't mention anything about next year in the letter.

jem16

redbuzzard wrote: »

You will have to put your SIPP contributions on your tax return to get the relief (or keep it, if you have had your tax code adjusted).

That's the whole point. It is not necessary to complete a tax return just to get the extra tax relief.

jamesd

It's very common for higher rate tax payers to always try to use pension contributions for all of their higher rate pay. So no surprise if HMRC expects that.