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

jem16

zagfles wrote: »

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

Yes but there is obviously something else going on with the OP's PAYE tax bill.

On a 810L tax code, the tax due on £43,761 (before SIPP contributions) would be £7390.40. The OP has only paid £7282 of tax which is why s/he only got £151 of a rebate as opposed to £257.20.

So whatever has come about to reduce the tax bill in the first place would possibly mean a lower contribution would be needed into the SIPP.

zagfles

Linton wrote: »

Please can you show your calculation.

See post #2. Basic rate band would be extended by gross SIPP conts (plus any gift aid) to at least £36195 so no tax would be due at higher rate. So just tax at basic rate on gross income minus personal allowance.

militantconsumer

OK, thanks to everyone for their help on this, I think I've got the basics worked out now for my 13/14 tax year.

Gross income (salary & interest) = 54,080

Tax payable = basic rate of 6,402 and higher rate of 5,052 = 11,454

Now, if I want to hit the target of paying exactly zero higher rate tax I calculate I need to pay net pension contributions of 10,105 which will be grossed up to 12,631. This will extend my basic rate band from 32,010 to 44,641, meaning I can earn 54,080 without paying any higher rate tax (as the personal allowance of 9,440 plus 44,641 = 54,081 which is £1 over what I earned).

Now for the complication....... the 54,080 I gave as my gross income above is actually after deducting childcare vouchers. These were £243 per month so £2,916 for the year, so I'm giving myself full tax relief for this, whereas post April 2011 I should only be getting half of it if I'm a higher rate taxpayer? Or do I get all of it because I'm turning myself into a basic rate tax payer? Or will HMRC say I'm still a higher rate taxpayer due to the half of the childcare vouchers which I shouldn't have had tax relief on increasing my income again, in which case I'd need to make an even higher pension contribution......?!

Thanks so much for anyone who can explain the answer to this.

militantconsumer

Oh dear, looks like this one might have got even the MSE experts as confused as me?

Either that or they're too busy calculating their own year end tax sheltering!

zagfles

militantconsumer wrote: »

OK, thanks to everyone for their help on this, I think I've got the basics worked out now for my 13/14 tax year.

Gross income (salary & interest) = 54,080

Tax payable = basic rate of 6,402 and higher rate of 5,052 = 11,454

Now, if I want to hit the target of paying exactly zero higher rate tax I calculate I need to pay net pension contributions of 10,105 which will be grossed up to 12,631. This will extend my basic rate band from 32,010 to 44,641, meaning I can earn 54,080 without paying any higher rate tax (as the personal allowance of 9,440 plus 44,641 = 54,081 which is £1 over what I earned).

Looks right

Now for the complication....... the 54,080 I gave as my gross income above is actually after deducting childcare vouchers. These were £243 per month so £2,916 for the year, so I'm giving myself full tax relief for this, whereas post April 2011 I should only be getting half of it if I'm a higher rate taxpayer? Or do I get all of it because I'm turning myself into a basic rate tax payer? Or will HMRC say I'm still a higher rate taxpayer due to the half of the childcare vouchers which I shouldn't have had tax relief on increasing my income again, in which case I'd need to make an even higher pension contribution......?!

Thanks so much for anyone who can explain the answer to this.

Depends when you joined the scheme. The govt have made this stupidly complicated. See the link I posted above, also http://www.hmrc.gov.uk/childcare/ See the employer's guide - that gives the full information.

militantconsumer

I joined post April 2011, so it boils down to whether I'm a higher rate taxpayer or not.

I'm avoiding being a higher rate tax payer due to the pension contributions, but if I receive too much in childcare vouchers does that make me a higher rate taxpayer in itself?

This is something I can't find the answer to anywhere!

militantconsumer

OK, looks like my employer should have carried out a "basic earnings assessment" when I joined the scheme, and this would have identified that I was not entitled to the full amount due to being a higher rate taxpayer.

(I don't think it's possible to take personal pension contributions into account in the test).

If they get it wrong then the extra tax has to be paid through the P11d return.

I wonder if HMRC will pick this up when I try to claim my tax relief for the SIPP contribution.

JGal

on a similar question, how much net can I pay into a group personal pension for every £1000 of income taxed at the higher rate to make the most of higher rate relief on contributions?

I'm presuming it's £600 per £1000.

jem16

JGal wrote: »

on a similar question, how much net can I pay into a group personal pension for every £1000 of income taxed at the higher rate to make the most of higher rate relief on contributions?

I'm presuming it's £600 per £1000.

If it's paid from net salary, then you would pay in £800 and the provider credits the basic rate tax relief of £200. You then receive the other £200 via your tax return or a change to the tax code which means it costs you £600 in the end.

If paid from gross salary you pay in the full £1000 and pay less tax as it reduces your taxable income.

JGal

jem16 wrote: »

If it's paid from net salary, then you would pay in £800 and the provider credits the basic rate tax relief of £200. You then receive the other £200 via your tax return or a change to the tax code which means it costs you £600 in the end.

If paid from gross salary you pay in the full £1000 and pay less tax as it reduces your taxable income.

Thanks.
So if I had 10k of income (salary, savings interest, dividends) that would attract 40% tax and I'd paid 1k in pension contributions through the year from net salary then I'd only get higher rate relief on a additional net lump sum payment of 5k, and any payment in addition to that would only get basic 20% relief? (my salary is only taxed at basic rate).