SIPP/Tax question

Trumpeter

I need to start by saying that I know virtually nothing about pensions. I've never needed to. I joined a company Final Salary scheme at the age of 18 & I'm still there 30 odd years later. Luckily it's one of the few that's left.

If I were to start a SIPP with the intention of withdrawing the funds as a lump sum, could this be done to reduce income tax liability. I am a Higher Rate taxpayer currently earning just under £50K pa. Could I reduce my taxible earnings by putting say £10K pa into a SIPP then after the age of 55, withdraw it at basic rate tax, providing of course that my earnings in retirement are below the HRT limit?

If so, does this have to be done through my employer or is the tax reclaimed later?

And finally, does it just apply for the next tax year or can it be backdated from saving?

Sorry if these are daft questions but as I said earlier, I have had no real need to know this stuff.

Thanks in advance.

bigadaj

You can open ultimately a SIPP or personal pension and contribute to it separately from your company scheme. Assuming you're earnings are net of your company contributions at £50k and you have standard personal allowance you can contribute about £8k gross and get 40% tax relief, ,earning that amount would only cost you £4,800 net.

Basic rate tax relief is reclaimed by your pension provider and you claim the higher rate back through your tax return. If this is a regular contribution then hmrc may adjust your tax return rather than reimburse.

You only have two or three weeks to use this years allowance, and you can't claim back from previous years as you only get tax relief on your current years earnings.

jem16

Trumpeter wrote: »

If I were to start a SIPP with the intention of withdrawing the funds as a lump sum, could this be done to reduce income tax liability.

Yes it could.

I am a Higher Rate taxpayer currently earning just under £50K pa. Could I reduce my taxible earnings by putting say £10K pa into a SIPP then after the age of 55, withdraw it at basic rate tax, providing of course that my earnings in retirement are below the HRT limit?

Yes but remember that only the contributions that match the amount you are in the higher rate tax bracket by would received higher rate tax relief. If you already pay pension contributions, it is unlikely that you would get 40% tax relief on £10k worth of SIPP contributions as well.

If so, does this have to be done through my employer or is the tax reclaimed later?

Your employer has nothing to do with personal pension contributions. Basically you would pay the pension provider the amount you wanted minus 20%. The pension provider then reclaims that 20% tax relief for you and adds it to your pension. You would then contact HMRC to claim the other 20% as appropriate.

And finally, does it just apply for the next tax year or can it be backdated from saving?

It can apply for this tax year if you get your contribution paid in before 6th April. It cannot be backdated to previous years - tax relief is only available in the tax year the contribution is made.

Just remember that you don't need to use a SIPP for this - a Personal Pension will do the same job and probably will be cheaper.

fairleads

Trumpeter wrote: »

If I were to start a SIPP with the intention of withdrawing the funds as a lump sum, could this be done to reduce income tax liability. I am a Higher Rate taxpayer currently earning just under £50K pa. Could I reduce my taxible earnings by putting say £10K pa into a SIPP then after the age of 55, withdraw it at basic rate tax, providing of course that my earnings in retirement are below the HRT limit?

To obtain the max 40% taxrelief on all contribs for tax year ending April 2015 contribute £6.5K. This will be grossed up to £9,760 by HMRC.

jem16

fairleads wrote: »

To obtain the max 40% taxrelief on all contribs for tax year ending April 2015 contribute £6.5K. This will be grossed up to £9,760 by HMRC.

No it won't. If you contribute £6500 it will be grossed up to £8125.

kidmugsy

Eventually you'll need to be wary about the annual limit for contributions, because they include against it the annual increase in value of your final salary pension. To start with, however, you should presumably have little problem because you can carry forward the unused part of your limits for the previous (I think) three years.

Either learn all about it from other threads on this forum, or see an accountant quickly enough that you can make a contribution this year.

fairleads

jem16 wrote: »

No it won't. If you contribute £6500 it will be grossed up to £8125.

If you contribute the same amount on a monthly basis HMRC will also gross up the other 20% monthly. But if you don't ask the question ......

jem16

fairleads wrote: »

If you contribute the same amount on a monthly basis HMRC will also gross up the other 20% monthly.

The only way to get £9760 into the SIPP/PP is to contribute £7808 whether it is monthly or annually. The pension provider will only apply basic rate tax relief. The other 20% will be refunded back to you either as a cheque or by paying less tax through a tax code adjustment.

fairleads

jem16 wrote: »

The only way to get £9760 into the SIPP/PP is to contribute £7808 whether it is monthly or annually. The pension provider will only apply basic rate tax relief. The other 20% will be refunded back to you either as a cheque or by paying less tax through a tax code adjustment.

So how do Hr tax payers obtain HR taxrelief on their pension contribs ?
Incidentally, the HR taxrelief calcs on pension contribs are a little more involved than your understanding

jem16

fairleads wrote: »

So how do Hr tax payers obtain HR taxrelief on their pension contribs ?

By the method I've just described above.

Contributions made from net salary to the likes of a SIPP or PP will see 20% basic rate tax relief applied by the pension provider. The other 20% tax relief is claimed from HMRC and will be refunded either as a cheque or as a reduction in tax either via the tax code or tax return.

Changing the PAYE tax code will give you an extra allowance so less of your earnings will be subject to higher rate tax. When it's done via the tax return your basic rate band is uplifted by the amount of the gross contribution so again you pay less tax. None of this extra relief will find its way into your pension which is why it's important to calculate the gross payment minus basic rate tax relief.

Contributions made from gross salary have no need to claim HR tax relief as it's given automatically via a reduction in your taxable income. Salary sacrifice schemes also work in the same way. HMRC have no need to know about these contributions as you never pay tax in the first place to claim back.

Incidentally, the HR taxrelief calcs on pension contribs are a little more involved than your understanding

My understanding is fine, thank you. It's really very simple - work out the gross payment and deduct 20% basic rate tax relief.

Trumpeter

Thanks for the replies & the help so far. Now that I know I can do it, I just need to finalise the amount for making the most of the tax relief. I see there is a bit of disagreement over this so would it help if I quoted the actual figures?

My taxible earnings for this year (after payments into my company pension scheme) are £45500 so how much would I need to contribute to reduce my tax liabilities to below the higher rate?

TIA