Salary / Income Tax / SIPP

cantdecide_2

Hi
A fairly simple (hypothetical) question but I don't seem to be able to find the answer.

Basic Salary £41,866
Profit related pay annually approx £10

Based on these figures I would pay 40 % income tax on the profit related pay

If however, I start to pay £1000 per month (total £12,000) into a SIPP pre tax would there be the potential to earn another £12,000 before starting to pay 40 % tax again ?

Thanks in advance

Your_Hero

cantdecide wrote: »

Hi
A fairly simple (hypothetical) question but I don't seem to be able to find the answer.

Basic Salary £41,866
Profit related pay annually approx £10

Based on these figures I would pay 40 % income tax on the profit related pay

If however, I start to pay £1000 per month (total £12,000) into a SIPP pre tax would there be the potential to earn another £12,000 before starting to pay 40 % tax again ?

Thanks in advance

Yes because your pension contribution expands your basic rate threshold, so in this example a £12k gross pension payment would mean £12k you earn in profit related pay will be taxed only at 20%. You need to file a tax-return for this though if it's a regular thing. Or you could phone/write to HMRC if it's a one-off.

cantdecide_2

Hi
Thanks for the reply

If though, the 12 k was paid in to the SIPP gross surely I wouldn't pay tax on it ?

SomeUser

If you have a SIPP (a non company one), you would make the contributions out of your net salary. The provider will then claim back 20% tax on it.

If you would be a 40% earner, then you would need to fill out an annual tax return and your tax code would be adjusted for the following year for the 40% tax.

You can only pay into a pension from your gross salary if your employer offers salary sacrifice, and the payments would only go to an occupational or workplace pension (not a non work related, personal one).

Your_Hero

cantdecide wrote: »

Hi
Thanks for the reply

If though, the 12 k was paid in to the SIPP gross surely I wouldn't pay tax on it ?

You won't pay tax on it, that's why it's called gross.

But the £12k you earn through the profit-related pay will still be taxed at 40% under PAYE. HMRC isn't going to know you've paid £12k into your pension. This is why you need to complete a tax return normally.

So what actually happens is you need to pay £9600 net into your SIPP, which will be grossed up to £12,000 (This is your first 20% relief). If you are a higher rate payer, you can claim another £2400 (the other 20% as your basic rate band has extended). This makes the net cost to you at £7200 for a £12000 pension contribution (40% relief).

http://www2.skandia.co.uk/Adviser/KnowledgeDirect/Pensions/pension-contributions-and-tax-relief/Higher-rate-relief-on-personal-contributions-to-a-personal-pension/

kangoora

Slightly different to the above as my 'extra' cash isn't salary but is sitting in my bank account. Hoping for an answer here, I'm making salary sacrifice into my pension which takes my taxable salary to just over the 40% band, so still paying 40% tax on a couple of thousand pounds income. All of my pension payments are salary sacrificed and go into the pension as employer contributions.

I've used up my ISA allowance for this year but have still got some other money in my bank account of around £12k. If I contribute this £12k into my pension fund am I able to claim the 20% extra from the taxman after it is grossed up by the pension company.

So, ideally, £12k = £15k into pension and then claim back £3k from HMRC as higher rate tax relief (I hope).

I'm just a little worried that the £12k contribution would only be eligible for tax relief at 20% and not for the extra 20% on top from HMRC.


PS I am maxed on my employer matching contributions if that makes a difference

Your_Hero

kangoora wrote: »

Slightly different to the above as my 'extra' cash isn't salary but is sitting in my bank account. Hoping for an answer here, I'm making salary sacrifice into my pension which takes my taxable salary to just over the 40% band, so still paying 40% tax on a couple of thousand pounds income. All of my pension payments are salary sacrificed and go into the pension as employer contributions.

I've used up my ISA allowance for this year but have still got some other money in my bank account of around £12k. If I contribute this £12k into my pension fund am I able to claim the 20% extra from the taxman after it is grossed up by the pension company.

So, ideally, £12k = £15k into pension and then claim back £3k from HMRC as higher rate tax relief (I hope).

I'm just a little worried that the £12k contribution would only be eligible for tax relief at 20% and not for the extra 20% on top from HMRC.


PS I am maxed on my employer matching contributions if that makes a difference

It works in the same way whether paying from net salary or money in the bank.

so still paying 40% tax on a couple of thousand pounds income

It's only this "couple" of thousand that will receive the 40% relief then assuming no other sources of income.