Dumb question - SIPP limit and tax relief

xylophone

"Why didn't I figure that out a long time ago - doh!"

Possibly because neither the Govt web site nor the HMRC web site make the position clear for earning non-taxpayers.

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

http://www.hmrc.gov.uk/incometax/relief-pension.htm?words=Breivik

dunroving

xylophone wrote: »

Possibly because neither the Govt web site nor the HMRC web site make the position clear for earning non-taxpayers.

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

http://www.hmrc.gov.uk/incometax/relief-pension.htm?words=Breivik

Interesting, in the first link, it says (my underline):

"If you don’t pay Income Tax


You still automatically get tax relief at 20% on the first £2,880 you pay into a pension each tax year (6 April to 5 April) if both of the following apply to you:

• you don’t pay Income Tax, eg because you’re on a low income
• your pension provider claims tax relief for you at a rate of 20% (relief at source)"

- and in the second link (again, my underline):

""If you don't pay tax you can still pay into a personal pension scheme and benefit from basic rate tax relief (20%) on the first £2,880 a year you put in. In practice this means that if you pay £2,880 the government will top up your contribution to make it £3,600. There is no tax relief for contributions above this amount."

- that's a bit misleading, surely? It implies someone on a low income of, say, £8,000 only gets relief on the first £2,880 ... which according to the previous posts, isn't true (they'd get tax relief on more than £2,880 if they paid more than that into a SIPP).

xylophone

As I said, the position is not made clear - the links equate low earnings to earning £3660 or under/having no relevant earnings at all.

Relevant earnings is not explained.

They do not cover the position where an individual has relevant earnings over £3660 but under his personal tax allowance.

Even HL do not explain the position adequately.

http://www.hl.co.uk/pensions/sipp/how-much-can-i-invest

"Scenario 1 I am a non- earner or earn less than £3600"

"You can receive 20% tax relief even if you don't pay tax. The maximum you can contribute is £3,600 gross - a payment of £2,880 to which the taxman adds £720. This is the case even for people who don't pay tax, such as children and non-earning spouses."

You will notice that they do not go on to explain what happens if you earn more than £3600 but less than your personal tax allowance!

But Tolley explains (see first link in my first post)

"Amount of contributions - limited by income

If the member’s income is more than £3,600 then his limit of tax relieved contributions (subject to the annual allowance rule) is the amount of his relevant UK earnings chargeable to income tax in the year."

The earnings are chargeable to tax but tax is not paid until the tax free threshold is exceeded.

Shedman

Dunroving

I had same query as you as it looked 'wrong' but as has been indicated by others it is right. I was at a retirement seminar today that my wife's employer was running and so I took the opportunity to ask the IFA that was presenting the same question and he also confirmed it (not that I doubt the sage wisdom of the likes of Xylophone, JamesD, Triumph13 etc on here but the more confirmation the happy I feel especially as I intend to put the whole of my earnings into a SIPP this tax year due to impending redundancy)

dunroving

OK, another dumb, but related, question:

The tax year runs from April 6 to April 5 (correct?)

Pay slips usually run from 1st of the month to last of the mnth.

So ... how do you calculate your fiscal year pension contributions from your pay slips?

For example, April 2014 pay slip summary will include the first 6 days, that belong to the previous tax year.

And April 2015 pay slip summary will include the first 5 days, that belong to the current tax year, and the rest belong to next tax year ....

Confusing!

(Can you tell I have recently decided to try to maximize my pension contributions, and calculating how close I am to maxing is doing my head in).

[I realise I should be fine this year, because I have unused allowance from the past three years. However, in a couple of years I will be emptying my US retirement accounts and putting into a SIPP, so I will be much more likely to be testing the annual limits, especially as by then they will probably be down to £20k!]

jamesd

The first of those links should make it clear in its first sentence: "You can get tax relief on private pension contributions worth up to 100% of your annual earnings". However, there is a better HMRC page, RPSM05200020 - Members Pages: Contributions and tax relief: Member contributions - overview: How much can I pay?

"there are limits to the amount of tax relief you can receive on those contributions. In effect if you are resident in the UK you can contribute up to 100% of your relevant UK earnings, or £3,600 if this is higher, in any one tax year and receive tax relief.
...
Example

If your earnings are £10,000 per annum and you wish to contribute £12,000 using some of your savings, then the contributions that will receive tax relief will be restricted to £10,000."

jamesd

The relevant tax year is the year in which the payment is made into the pension. So March would normally be paid in before 6 April, in time to be in the year ending 5 April. While the end of April is comfortably after 6 April and in the new tax year.

So long as you get it done before midnight on 5 April the pension contribution will be in the tax year that is about to end.

Triumph13

Isn't it rather more complicated than that? I thought you needed to know the dates of the pension input periods for each of your pensions and then count the contributions in each period that ends in the tax year.

zagfles

Triumph13 wrote: »

Isn't it rather more complicated than that? I thought you needed to know the dates of the pension input periods for each of your pensions and then count the contributions in each period that ends in the tax year.

That's for the annual allowance. Not for the 100% of earnings/£3600 limit.

jamesd

PIPs are used for annual allowance calculations, that £40k allowance. See this HMRC page about it. then have a read of this Aviva page which covers to some extent the scope for increasing the allowance available by modifying PIPs.

You will need to know the PIPs of any pension schemes you're using to be sure you stay within the annual allowance. They are probably aligned with the tax year but they don't have to be.