Pension figures

berbatov10

I want to ensure I have the correct understanding of pension figures. My basic salary is £42,000, my earnings for this year to April 2015 will be £50,000. I am allowed to pay £40,000 into a SIPP? I already have a pension which I contribute to but I understand I can countback any underpayments upto £40,000 from the last 3 years in order to meet a £40,000 payment for this tax year? Although I want to contribute £40,000 I only need to pay £32,000 as the other 25% (£32,000 - £40,000) will be made up by HMRC?

As I am paying 40% tax on my earnings between £42,000 and £50,000 I can claim, by way of tax return 40% tax relief on £8,000 (difference between tax rates on £42,000 to £50,000) roughly £3200??

Please tell me if Iam miles wrong, or indeed if wrong full stop. Thanks

jamesd

You are entitled to tax relief on a maximum of £42,000 of pension contributions this year. This includes those to the pension that you already contribute to. This is because one of the two main limits to pension contributions that are entitled to tax relief is your earned income.

There is an additional limit, the £40k annual limit. This one applies only if it is more restrictive than your earned income. That is, you can use the lower of the two. But for this limit if you were in a pension scheme in the past three years you can carry forward the unused allowance to let you exceed £40k. This still doesn't let you go over the earned income limit, though.

Those limits are gross, after allowing for basic rate tax relief. So if you were to pay in £40,000 net that would be too much. For your particular income to get £40k into the pension you'd pay in £31,973 net and you'd receive £8k of basic rate income tax relief and £27 of higher rate relief via your tax return or just writing a letter to or phoning HMRC. The amount to go into the pension would be £32,000 to get that £31,973 net of all relief contribution level.

berbatov10

James thank you for the clarification. I already have a final salary pension which kicks in at 58 so money I put into the SIPP would be for its tax efficiency. I am 53 years old and thinking of investing in a 60/40 VLS scheme via HL. Your thoughts are all welcome

TH1878

You say that your total earnings (presumably including bonus etc) will be £50k in this tax year....is this correct?

If so, James's calculations are incorrect.

You pay in £32,000 into your pension scheme. You automatically get the tax relief so the contribution is grossed up to £40,000 but then you will be able to reclaim an additional £1,627 through your tax return:

(£50,000 - £41,865) * 20% = £1,627

So a £40k gross contribution will end up costing you £30,373.

jem16

jamesd wrote: »

Those limits are gross, after allowing for basic rate tax relief. So if you were to pay in £40,000 net that would be too much. For your particular income to get £40k into the pension you'd pay in £31,973 net and you'd receive £8k of basic rate income tax relief and £27 of higher rate relief via your tax return or just writing a letter to or phoning HMRC.

The OP would need to pay in £32k, not £31,973 to get £40k in the pension.

jem16

berbatov10 wrote: »

As I am paying 40% tax on my earnings between £42,000 and £50,000 I can claim, by way of tax return 40% tax relief on £8,000 (difference between tax rates on £42,000 to £50,000) roughly £3200??

Please tell me if Iam miles wrong, or indeed if wrong full stop. Thanks

Slightly wrong there. You claim an additional 20% tax relief on that £8k as 20% has already been credited by the SIPP provider so £1600. tH1878 has given you the exact figures based on the 40% threshold.

berbatov10

TH1878 yes that is correct, overtime payments will make it up to Circa £50,000. Many thanks all for correcting me, it seems a ''no brainer'' to invest in some low/medium risk fund. I would welcome what you think of VLS 60/40 type fund and open to other suggestions.

berbatov10

Or should I go for a mix of funds from the HL SIPP suggestion pages?

xylophone

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

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

(Although there is still no adequate explanation of tax relief for those who have earned income but not enough to take them above their annual allowance - however, this is not relevant to you.)

http://www.hmrc.gov.uk/tools/pension-allowance/index.htm

kidmugsy

If I were you, I'd be tempted to contribute enough to avoid the 40% tax, but no more. The reason is that 20% tax relief may seem feeble in a couple of years time when there is a possibility that the next government, of whichever colour, will replace 20%/40% tax relief by 30% or perhaps 33%. So you could divert the money that would otherwise get only 20% relief to an ISA instead, to await developments.

P.S.What to invest in depends partly on when you plan to draw the money out again.

berbatov10

Xylophone thanks for the calculators. Kidmugsy excuse my ignorance but enough to avoid 40% from that I take it you mean around £8,000 or just over(The portion I will pay 40% on£42-50k??). I have been left some money and I would like to make it as efficient as I can.
In relation to what I plan to do when I draw the money out again, I actually thought I would leave it to tick over in the pension fund, maybe returning me 4% per annum or is that over optimistic in a low to medium risk SIPP?