Non earner SIPP contributions

jamesd

HL is just reporting that the amount added to the pension is the 20%, not the total relief you can get. You already know that your last sentence is wrong because that's referring to the amount that can be paid in, not to the amount of relief. Don't be surprised that places just assume that a person with no employment isn't paying higher rate income tax, it's not a common combination.

HMRC doesn't make that mistake in RPSM05200020 - Members Pages: Contributions and tax relief: Member contributions - overview: How much can I pay?:

"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. If your relevant UK earnings are less than £3,600 you can only receive tax relief on contributions of more than 100% of your relevant UK earnings if the contribution is made using the relief at source method - see RPSM05201010."

RPSM05201010 - Member Pages: Contributions and tax relief: Member contributions - methods of obtaining tax reliefs

"your contributions to the pension scheme can be treated as amounts paid after deduction of basic rate income tax. The pension scheme can then recover the tax relief at the basic rate from HMRC on your behalf and add it to the your pension fund. This is called the Relief at Source method of giving tax relief and is regarded as the standard method of obtaining tax relief if you have relevant UK earnings to tax of less than the basic amount of £3,600.
If you are a higher rate taxpayer you will also need to make a claim for any additional tax relief by making a claim"

If you still disagree, please provide the relevant HMRC or legislative source.

xylophone

Don't be surprised that places just assume that a person with no employment isn't paying higher rate income tax, it's not a common combination.

I know a couple of pensioners with no "relevant earnings" but who are higher rate tax payers - there must surely be numbers of people whose occupational pensions plus state pensions plus savings income etc put them into this category?

Presumably such a pensioner, if under 75, could contribute £2880 to a pension, a SIPP for example, and receive basic rate relief at source.

If his income (even though "non-relevant") was say £45,000, he would report a gross contribution of £3600 on his self assessment form and receive a tax refund, thus obtaining his additional tax relief?

jamesd

That's what I expect, since I see no signs of any special rule in the HMRC pages.

In a similar sort of not expected by many way, I get higher rate income tax relief and basic rate salary sacrifice NI on some of my income. Happen to have income outside work that means once work enters basic rate PAYE I'm still in higher rate income tax for another £4,000 or so and get a combined 58.9% income tax and NI relief on it.

bowlhead99

jem16 wrote: »

Originally Posted by jamesd
I think that is not correct and that you will receive higher rate income tax relief. HMRC increases your basic rate band by the gross amount of your pension contribution. that would increase it by 3600 and that in turn will deliver you the higher rate relief.

Not according to HL. http://www.hl.co.uk/pensions/interactive-calculators/tax-relief-calculator

Non-taxpayers - non-taxpayers receive basic rate tax relief. For those without earned income, the maximum payment is £2,880 to which the taxman adds £720, to make a total gross contribution of £3,600.

Tax relief is limited to 100% of earnings so if no earnings then that's £0 tax relief available. (apart from the basic rate relief on the £3600)

HL's comment is about non taxpayers and in their marketing to the mass market, simply doesn't talk about the relatively rare situation where someone is on low or zero earned income and is a high rate taxpayer. Their goal is to convince a lot of people to invest who might not have thought of paying into pensions because they didn't pay tax anyway. There are millions of those people, and those people usually don't do tax returns.

If they had added in stuff about the rare edge cases where you might not get enough relief directly into your HL pension and have to start doing tax returns to chase the 'taxman' yourself for the rest of it, it starts to sound a bit complicated to Mrs Littleoldlady and the concept of free money is no longer as much of a draw when the nice headline is diluted by bits of small print talking about people who have a different position to you.

They are right that the max payment you can make without relevant earnings is the 2880 to make total gross of 3600 after the 'taxman' has grossed it up. But in rare cases, that grossup is not sufficient (or rather, you have overpaid your net amount) so my understanding is that the taxman will take a claim from you for that at the end of the year when you pay your taxes from all your other, non relevant, earnings.

So:
HL's comment that a non taxpayer can receive basic rate tax relief, is factual.

HL's comment that if you don't have relevant earnings you are restricted to paying in £2880 into your HL account is also factual, and the idea that the £2880 contribution physically paid to HL will turn into £3600 max gross contribution is also factual.

And HMRC's comment that you can only get tax relief on more than 100% of relevant earnings by using a 'relief at source' method (such as, give money to HL) is also factual because if you only have an employer paying £240 a month to you under an employment contract (£2880 a year in salary), the employer is not allowed to change your paycheque to zero and give a pension company £3600 gross. Well, they could, but that would be seen as them giving you a pay rise and contributing 100% of your, now increased, relevant earnings, and not as paying you a £2880 salary and contributing 125% of relevant earnings.

Then there is the follow-up question for a small minority of people who have low relevant earnings and have had to put 2880 into their HL account because it is the only way of creating a gross pension pot as high as 3600... BUT they are a high rate taxpayer and would have preferred to have only paid out £2160 to HL if it were possible for HL to claim a 40% grossup (which of course HL can't do). The specific question is un-asked and un-answered on HL's site.

It is not explicitly asked and answered on HMRC's page RPSM05201010 as jamesd mentioned either, where the question is simply headed 'what are the different methods of claiming tax relief?'. It mentions four standard ways of getting relief, of which one of them is relief at source gross up by a pension provider (which it notes is standard for people with NRE under £3600) and one of them is doing a tax return if you're a higher rate taxpayer who needs to get more relief than they were given at source.

I use the combination of these two methods to get my full 40%+ tax relief on SIPP contributions that I make from net pay. It doesn't say I would no longer be able to combine the methods to get my full 40%+ tax relief if my NRE dropped below £3600 and I was still fortunate enough to be in the 40%+ tax brackets.

Effectively HMRC allow non-relevant-earners £3600 of gross pension contribution. If you are a high rate taxpayer who diverted £3600 of gross income into a pension pot, you would expect it to have cost you £2160 of cold hard cash at the end of the day; so if you paid £2880 for it you've not been given enough relief, and you can get that if you qualify for it, afaik.

So, to cut a (very) long story short, I agree with jamesd that this is possible, and the pensioners in xylophone's example could do exactly what is suggested. There will certainly be people getting £45k of income out there who don't get any of that from current employment. It's just that the member pages of the HMRC registered pension scheme manual do not have a 'frequently asked question' on the exact point and presumably you are supposed to put two and two together and make four. The linked page simply ends with

You cannot choose which method of tax relief applies, this is determined by the method the pension scheme is allowed to operate under the legislation. You should contact your scheme administrator for further guidance.

Presumably if you asked your scheme administrator what happens to the money you give them, they would tell you that what you give them is grossed up for Basic, and whatever else you want for Higher you can get off HMRC. If you tell them you have NRE of under 3600 they would tell you that they can only accept 2880 of contributions from you, as we all know.

However, they probably don't get a lot of people asking if one can still ask HMRC for more after they give you the Basic, if you have low NRE. So potentially there is scope for you to get inaccurate info from junior staff manning the phones. You would hopefully get there in the end. Ultimately if you go to a tax return form and see what is calculated, you should get the same as what Jamesd indicates.

On the SA100 page 4 it asks for "Payments to registered pension schemes where basic rate tax relief will be claimed by your pension provider (called ‘relief at source’). Enter the payments and basic rate tax". You just put your figures in, whether they are £3600 or £36000. You don't even need to look at any of the additional information pages if you are not messing about with prior year allowances and so on. On the SA150, the 'how to fill out your tax return' leaflet, it says on page 18 that the max amount you can get tax relief on is 3600 or if higher, your NRE. And it mentions what we already know, that "The tax relief for contributions up to £3,600 that are more than your taxable UK earnings can only be given if the pension scheme is a ‘relief at source’ scheme".

But there is absolutely nothing to suggest that if your NRE is low they are going to restrict your claim for higher rate tax, and you should be able to prove by running dummy numbers through the form that they have set it up to give you the 40% total relief on the £3600 if you were paying 40% tax overall before you filled the pension box in. Caveat, I have not bothered to do this as that is a step too far for a sunday morning when the situation doesn't affect me anyway

I know that a simple online form is not the same as authoritative guidance but it is often a useful rule of thumb and there doesn't seem to be any authoritative guidance that contradicts the above. As HMRC moves their archive of useful manuals and references over to the new 'user friendly', 'clear' and imho dumbed-down .gov site, the detailed authoritative guidance is probably not going to get any easier to find. Still, if nobody can find anything that refutes the assertion that a person can claim it, and the tax return form allows you to claim it and reduces your tax bill, I would think that's good enough?

Tax doesn't have to be taxing... :rotfl:

jem16

jamesd wrote: »

If you still disagree, please provide the relevant HMRC or legislative source.

To be honest James I'm not sure whether I agree or disagree. I can see exactly where you're coming from and it does seem quite possible that you could get higher rate tax relief on the £3600. However everything I've seen seems to only ever mention basic rate tax relief being due.

Perhaps some of the accountants on the Cutting Tax board will have come across this with their clients. I'll ask out of curiosity.

Aegis

jem16 wrote: »

To be honest James I'm not sure whether I agree or disagree. I can see exactly where you're coming from and it does seem quite possible that you could get higher rate tax relief on the £3600. However everything I've seen seems to only ever mention basic rate tax relief being due.

Perhaps some of the accountants on the Cutting Tax board will have come across this with their clients. I'll ask out of curiosity.

For the record, everything I've ever seen indicates that pension contributions are always treated as pension contributions in the same way except where the annual allowance is breached. As such, as far as I'm aware the £3,600 contribution is deductible for higher and additional rate tax (plus reclaim of the personal allowance where applicable) if the individual has income at the right level but not relevant earnings. I can't recall seeing anything in the Registered Pension Schemes Manual that would lead me to believe that this isn't the case.

The closest is in RPSM05101120, which states:

The maximum amount of contributions on which a member can claim relief in any tax year is the greater of

• the ‘basic amount’ – currently £3600, and
• the amount of the individual’s relevant UK earnings that are chargeable to income tax for the tax year.

Where a member’s relevant UK earnings chargeable to tax are less than £3,600, tax relief on the amount of any contribution over the level of their earnings up to the £3,600 limit can only be given if the contribution is paid to a pension scheme that operates the relief at source (RAS) system.

This seems to specifically state that basic relief at source is still available where taxable income is exceeded by the level of the contribution. It doesn't expressly limit the amount of tax relief in any other way.