Income/pension question

berbatov10

I hope I am posting this on right forum, it fits in a couple but is linked to pension/retirement planning.
I earnt from my employment approx £8000 into the higher tax bracket this year (£42-£50K) which I have invested into a Fidelity SIPP. Alongside this I have 2 x BTL properties which are mortgaged. The monthly payments combined roughly cover the 40% tax which I would pay if it was pure income which leaves a sum of around £9500. Would I be entitled to invest this in a SIPP and claim 40% tax relief on it??
I hope this makes sense

atush

You can't put BTL income into a pension as it isn't earned income.

But there is nothing stopping you putting more into your pension from your 50K employment (up to 40K PA) and living off the rental income.

jamesd

Yes, you can pay the money into a SIPP to get the tax relief. There are two limits;

1. Your earned income. Which appears to be £50,000.
2. The annual allowance, which is £40,000. This is a cap if your earned income is higher. If you were in a pension scheme of any sort even not paying in you can carry forward unused allowance from the previous three tax years to allow you to go over £40,000.

So you can pay at least the £40,000 of your earned income into a pension this tax year and get tax relief. If you have £10,000 of carry over allowance available you could use the whole £50,000.

You could not pay in £59,500 because the £9,500 of BTL isn't earned income so it doesn't count when determining what you can pay in.

I assume that you would have gross employment income of £50,000 plus BTL income of £9,500 gross. You could then pay £17,500 gross of basic rate tax relief into a pension this tax year and receive 40% income tax relief on it. You would pay in net £14,500 and the pension scheme would add 25% to give you the basic rate tax relief, leaving gross £17,500 in the pension. You would tell HMRC and they would give you a refund or adjust your tax code or SA bill to give you the additional higher rate relief, which they do by increasing your basic rate band by the £17,500.

Nothing at all stops you from paying the BTL money into a pension if you want to. HMRC doesn't car where the money comes from. Assuming you have a bank account just for the BTL properties and are a sole trader so the account is in your name you could use the BTL account debit card or cheque to make the payment.

berbatov10

Guys thanks very much as pointed out I cant invest unearned income but can live on BTL income. Bear with me on this.... Can I open another SIPP, invest £X get the 40% tax relief then at 55 (18 months time) take 1/4 of that sum tax free?? Its just my thought process, I think i read someone did or is doing similar somehwere on here ?

atush

Technically yes, you could do this. But you'd need to open a pension that allows flexible DD as you would be leaving the 75% invested?

berbatov10

Sorry Atush could you explain further??

atush

If you want to take out your tax free lump sum of 25%, and leave the rest invested until you need to take it (or draw it at a rate you would like over the years) the pension you choose needs to allow this (ie FDD flexible drawdown).

So make sure before you open a pension that it does.

xylophone

If you want to take out your tax free lump sum of 25%, and leave the rest invested until you need to take it (or draw it at a rate you would like over the years) the pension you choose needs to allow this (ie FDD flexible drawdown).

OP proposes opening another SIPP - are there any that wouldn't allow drawdown?

http://www.hl.co.uk/pensions/income-drawdown/comparison

berbatov10

Xylophone as you say, that's why I suggested another SIPP as I thought there were fewer rules as such

berbatov10

On a similar vein if I paid in a lump sum to a stakeholder or PP for my OH who is a basic rate tax Payer would she be able to draw it all out subject to tax in 5 years?

kidmugsy

berbatov10 wrote: »

On a similar vein if I paid in a lump sum to a stakeholder or PP for my OH who is a basic rate tax Payer would she be able to draw it all out subject to tax in 5 years?

How old is she?