Understanding relevant earnings

Shedman

I have looked at HMRC's definition of relevant earnings and have hunted the web but can't seem to get a clear answer on this. If my wife earns a salary of £10k are her relevant earnings £10k or are they net of the personal tax allowance ie. £0. I thought I had read somewhere on this forum that one of the more informed people suggested that in this situation you could pay a net £8k into a SIPP and have HMRC add back £2k to gross it up to £10k even though effectively the wife wouldn't be paying any tax due to the personal allowance. Or have I got this completely wrong... seems too good to be true?

greenglide

Her relative earnings are £10,000 under these circumstances.

It is total of earned income. Savings, interest, property rentals etc don't count.

xylophone

http://adviser.royallondon.com/technical-central/information-guidance/contributions-and-tax-relief/member-contributions-tax-relief-and-annual-allowance/

Tax relief is calculated in tax years. In any tax year tax relief is only given on gross contributions of up to £3,600 or 100% of relevant UK earnings, whichever is the higher.

"What are relevant UK earnings?
In short this is:

employment income,
self-employed income,
income from patent rights,
certain redundancy payments,
earnings from overseas crown employment.
This means that salary counts as relevant UK earnings, but investment income and dividends don't."

Your wife may invest up to the total of her earnings (before deduction of personal allowance) in her SIPP but will pay this net of basic rate tax. In your example where the earnings are £10K, she can make pension contributions of up to £8k net to her pension plan and receive £2000 from HMRC through relief at source.

A person with no relevant earnings ( or earnings up to £3660) may make a net contribution of £2,880 and HMT will add £720.

Use the calculator here http://www.hl.co.uk/pensions/interactive-calculators/tax-relief-calculator

jamesd

You're right, she can pay in £8k and get £2k of basic rate tax relief even though she's paying no income tax. She can't pay in £10k because the tax relief would take her over her earned income.

It's a useful approach for people in her situation. She will need to watch out for costs of taking the pension since some providers charge a lot for this sort of thing. Others don't.

Shedman

Thanks for the prompt responses from all of you. I was aware of the constituents of relevant earnings but HMRC use the phrase 'earnings chargeable to tax' so hence my confusion over gross or net of tax allowance for the figure. Appreciate the clarification that there is effectively a bit of a loophole here...presumably if I were to put my total salary (say £40k for simplicity) into a SIPP I would also pick up that 'free' £2k (even though the tax efficiency will depend on how I draw it out).

Nobody know if benefits in kind (eg BIK value of a company car) can count as relevant earnings as I have seen one HRMC page that indicates they are and another that seems silent on it. Again I have seen a thread on here where somebody suggests that they are but didn't seem to be any confirmation of that.

Thanks

Shedman

By the way I meant to say I understand the concern about costs of a SIPP with small sum but in the wife's case we would intend to take the 25% cash free sum and draw out the rest all in the next tax year so as to use her tax allowance for next year so would use a cheap SIPP provider such as X-O as it'll be a very simple and short lived SIPP

jamesd

Yes, you'd pick that up as well. The types of BIK that count for income tax count for relevant earnings. Not all forms of BIK count for tax.

xylophone

The types of BIK that count for income tax count for relevant earnings. Not all forms of BIK count for tax.

http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm05200060.htm

http://www.hmrc.gov.uk/manuals/eimanual/eim00530.htm