Confusion over effect of SIPP contributions at cusp of higher rate band

militantconsumer

Hi everyone, I'm hoping someone can help me as I've spent ages looking at other forum discussions and have also spoken to HMRC but I still can't work this one out.

In tax year 12/13 I had gross income of 43,761 and I contributed to my SIPP to the tune of 1,460 net or 1,825 gross. I was trying to wipe out the higher rate threshold but without 'wasting' money by putting it into my SIPP instead of my ISA.

What should my tax bill have been for that year? I paid 7,282 of tax and got a refund of 151 so they are saying it should have been 7,131 I think.

Did I pay too much into my SIPP to purely avoid higher rate tax and therefore do I only get extra relief on part of the SIPP contribution? Are they counting the tax already deposited into my SIPP at the time as part of the refund?

I have seriously tried so many spreadsheets on this and still can't work it out so would be really grateful if someone could explain.

zagfles

Yes £7131 is correct. What HMRC do is they extend the basic rate band by the amount of your gross contribution, thereby giving you any additional tax relief you are due. In your case it'd have wiped out any higher rate tax, you'd just pay 20% on anything over the personal allowance so you'd pay 20% on (43761-8105) ie £7131.20

You did put too much in if you wanted to just avoid 40%, you should have put in £1286 gross (£1029 net), ie salary minus allowance minus basic rate band

jem16

militantconsumer wrote: »

Did I pay too much into my SIPP to purely avoid higher rate tax and therefore do I only get extra relief on part of the SIPP contribution? Are they counting the tax already deposited into my SIPP at the time as part of the refund?

What was your tax code for that year?

Higher rate tax started at 42,475 so you would only be entitled to higher rate tax on £1286 of that £1825 gross payment. Any taxable benefits would change that though.

Basic rate tax relief is applied by the SIPP provider so it would only be 20% on the £1286 that was due which is £257.20.

As to your tax bill, we need to know what tax code was being applied.

Linton

Gross income 43761
Gross pension payment 1825

Taxable pay: 41936
Personal allowance 8105

Tax due on: 33831
40% band starts at 34371, so tax is 20%

Total tax due: 6766

Did you have any other income? Any taxable perks? Tax due from previous year?

From your figures you paid too much into your SIPP as you are £540 below the 40% threshold. But your figures dont tie up with the tax.

zagfles

Linton wrote: »

Gross income 43761
Gross pension payment 1825

Taxable pay: 41936
Personal allowance 8105

Tax due on: 33831
40% band starts at 34371, so tax is 20%

Total tax due: 6766

Did you have any other income? Any taxable perks? Tax due from previous year?

From your figures you paid too much into your SIPP as you are £540 below the 40% threshold. But your figures dont tie up with the tax.

The figures tie up perfectly. For RAS schemes HMRC don't deduct the gross amount before applying tax, they extend the basic rate band by the gross contribution to give relief on the difference between basic rate and higher rate.

militantconsumer

Thanks all, will build that into a spreadsheet and hopefully get it right for this tax year.

I guess I also need to deduct charitable donations (the net amount?) to get to the target.

Oh yes, and childcare vouchers too, but I think I remember hearing that HR tax relief had been abolished for those for a child born in 2012.

I didn't think about my tax code but if I settle each year with a tax refund wouldn't that mean I was just on the normal level of personal allowance so that wouldn't matter?

FatherAbraham

jem16 wrote: »

As to your tax bill, we need to know what tax code was being applied.

Hmm, I'm not sure that tax code is relevant.

Tax codes are part of PAYE, not income tax.

PAYE is a cashflow-management system, a bit like that monthly payment one makes to an energy company. It's just designed to stop there being a huge settlement payment in either direction when the year's account is reckoned up at meter-reading time, by being a regular, level payment.

In other words, PAYE is a bit of a guess at how much income tax will be due for theyear in quesiton.

Indeed, looking at tax codes can be extremely misleading, because sometimes they are used to collect tax underpayments from previous years.

Tax codes are important for one's cashflow, but they do not decide how much income tax is due. For efficient tax planning, one should not look at tax codes.

Warmest regards,
FA

jem16

FatherAbraham wrote: »

Hmm, I'm not sure that tax code is relevant.

It's not in so much as it wouldn't be used in the final tax calculation.

However what I was trying to ascertain is if the OP had any taxable benefits that he hadn't necessarily mentioned in his gross income as some people don't think that it should be added onto gross income.

If the tax code was lower than the normal 810L tax code, it would have given me a better indication but yes it could have been due to a previous underpayment. However the answer may have led to further questions.

zagfles

militantconsumer wrote: »

Thanks all, will build that into a spreadsheet and hopefully get it right for this tax year.

I guess I also need to deduct charitable donations (the net amount?) to get to the target.

No the gross amount. The tax return is confusing as (IIRC) you have to enter the net amount, unlike for pensions where you enter the gross amount, but in the calculation it will be grossed up, and your basic rate band gets extended by the gross amounts of gift aid plus pension conts.

Oh yes, and childcare vouchers too, but I think I remember hearing that HR tax relief had been abolished for those for a child born in 2012.

Childcare vouchers are usually salary sacrifice, so they'll already be deducted from your taxable/P60 income. Higher rate relief is "sort of" abolished for higher rate taxpayers, in that if you're classed as a higher rate taxpayer your relief is halved. See http://www.hmrc.gov.uk/leaflets/ir115.pdf

I didn't think about my tax code but if I settle each year with a tax refund wouldn't that mean I was just on the normal level of personal allowance so that wouldn't matter?

If you make pension/gift aid contributions every year they'll probably adjust your tax code to account for it. For gift-aid there's a "one off" box on the tax return, if you don't enter your contributions as "one-off" they'll assume you'll make them every year and adjust your tax code accordingly. Which is difficult if you're on the edge of paying HRT as they can only increase your allowance in PAYE, not your basic rate band, so they have to guess what you'll earn.

zagfles

jem16 wrote: »

It's not in so much as it wouldn't be used in the final tax calculation.

However what I was trying to ascertain is if the OP had any taxable benefits that he hadn't necessarily mentioned in his gross income as some people don't think that it should be added onto gross income.

If the tax code was lower than the normal 810L tax code, it would have given me a better indication but yes it could have been due to a previous underpayment. However the answer may have led to further questions.

The OP paid exactly the right amount of tax for his earnings, as above.

Linton

zagfles wrote: »

The OP paid exactly the right amount of tax for his earnings, as above.

Please can you show your calculation.