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

jem16

JGal wrote: »

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).

No - if you have £10k of gross income and you have paid £1000 net already (which is £1250 gross) then you still have £8750 gross payment to use up. That would be £7000 net payment into the pension to be grossed up to £8750.

Always think of the gross payment that needs to go into the pension and then subtract 20% basic tax relief. That's what you pay into the pension itself.

JGal

jem16 wrote: »

No - if you have £10k of gross income and you have paid £1000 net already (which is £1250 gross) then you still have £8750 gross payment to use up. That would be £7000 net payment into the pension to be grossed up to £8750.

I'm a bit confused there. Are you saying £8,000 net would give me £10,000 gross in the pension AND there'd also be an additional £2,000 due from HMRC for higher rate relief, giving £12,000 total when only £10,000 was taxed at 40%

I may not have been clear. In the example I didn't mean 10k total gross income, I meant 10k liable to higher rate on top of personal + full basic rate allowance. What's the most (net) that could be contributed that would qualify for relief at 40% assuming the £1,000 already contributed net?

jem16 wrote: »

Always think of the gross payment that needs to go into the pension and then subtract 20% basic tax relief. That's what you pay into the pension itself.

Yep.

PS apologies to the OP for possibly hijacking the thread!

jem16

JGal wrote: »

I'm a bit confused there. Are you saying £8,000 net would give me £10,000 gross in the pension

Yes.

AND there'd also be an additional £2,000 due from HMRC for higher rate relief, giving £12,000 total when only £10,000 was taxed at 40%

The extra £2000 comes back to you either in the form of a cheque rebate or if handled through an extra allowance on your tax code, via less tax paid on your salary. This will mean that the £8000 contribution has got you £10,000 in your pension but has only cost you £6000 - ie £8000 minus £2000. That extra £2000 never reaches your pension.

I may not have been clear. In the example I didn't mean 10k total gross income, I meant 10k liable to higher rate on top of personal + full basic rate allowance.

I realised that.

What's the most (net) that could be contributed that would qualify for relief at 40% assuming the £1,000 already contributed net?

£7000 as I said earlier.

JGal

Is it possible to get the rebate from hmrc on the higher rate contributions by direct payment rather than a tax code change before submitting an annual return?

If not I suppose that is an incentive to complete an annual return as early as possible?

What's the best practice in this situation (mopping up all higher rate taxable income with pension contributions)?

zagfles

JGal wrote: »

Is it possible to get the rebate from hmrc on the higher rate contributions by direct payment rather than a tax code change before submitting an annual return?

If not I suppose that is an incentive to complete an annual return as early as possible?

What's the best practice in this situation?

Yes you can get direct payment, though they'll usually assume you'll carry on making payments and adjust your tax code for future contributions. You can ask them not to if you want.