Paying additional income into SIPP

rich_b

Hi all,

I'm an employed 40% tax payer. If I then earn some money from a sideline and pay that into a SIPP I was wondering if my workings below are correct - it seems too good to be true. ;-)

E.g. Earn £2000, with expenses of £800. Profit £1200.

Option 1: declare income in tax return, pay tax of £480, keep balance of £720 as cash. Total benefit: £720.

Option 2: pay £1200 profit into SIPP. 20% tax relief added automatically to SIPP by government. Complete tax return and claim a further 20% tax relief due to being 40% PAYE tax payer. Total benefit: SIPP £1200+£240 (20%), Cash £240 tax rebate, grand total £1680.

For both options I have assumed no NI due to small earnings exemption - not sure if assumption valid as I pay 40% PAYE tax.

If I don't need the money now Option 2 seems a no brainer - but I'm not sure my workings are correct, so any validation or comments would be much appreciated. :-)

Thanks
Rich

rich_b

Looking at this again, have I double counted the tax relief when paying into the SIPP?

grey_gym_sock

no, that's not right ... you can't reclaim tax on the side income, because it's untaxed at source, so there is nothing to reclaim. you can only get out of paying 40% tax on it (i.e. save £480 tax), by putting it all into a SIPP.

to pay it all into a SIPP, you'd only directly pay in 80% of the profit, i.e. £960. then £240 is automatically added to the SIPP (this is the 20% - it's £240 because that's 20% of (£960 + £240)). then you would owe HMRC £240, which you could ask them to collect by adjusting your tax code for next year. the end result is that you've paid £1200, i.e. the whole profit, and all of this has found its way into the SIPP.

you can use the small earnings exemption for NI, since the sideline is counted separately from your main job for this.

(a personal pension might be better than a SIPP for such a relatively small contribution.)

rich_b

Thanks for explaining that - it all makes far more sense now. It was the "untaxed at source" bit I hadn't considered that threw me.