How SIPP affects taxable income

talexuser

Confused over working out tax code. I'm retired drawing a final salary pension and contribute to a SIPP to max of £2880 for unearned income. Since the SIPP has tax relief added to the fund to take the total to £3600 this presumably means the SIPP amounts do not affect tax code? Do they affect calculation of gross income?
Thanks.

robin61

There is no need to claim the tax relief your pension provider will add the extra to make it up to £3600. Some do it more quickly than others I believe.

zagfles

robin61 wrote: »

There is no need to claim the tax relief your pension provider will add the extra to make it up to £3600. Some do it more quickly than others I believe.

Unless OP pays higher rate tax.

talexuser

Thanks, so if tax relief is added automatically to the fund, then presumably the pension amount is no longer subtracted from taxable gross income figure?

robin61

zagfles wrote: »

Unless OP pays higher rate tax.

Yes. I just assumed he would be basic rate but probably best not to assume.

zagfles

talexuser wrote: »

Thanks, so if tax relief is added automatically to the fund, then presumably the pension amount is no longer subtracted from taxable gross income figure?

No. It extends the basic rate band, and it reduces "adjusted net income" which is used for child benefit tax for those earning over £50k and the personal allowance reduction for those earning over £100k, but it doesn't reduce gross income. It can be deducted for the purpose of certain benefits like tax credits, universal credit and I think 50% of it for housing benefit.

singhini

I'm confused


I have a SIPP (because my employer does not have a work based pension plan), rather they asked me to provide details on my personal pension plan nd thus I opened a SIPP so he could put money into it.
Employer put 7.5% into it (which he does, his contribution is correct to the exact penny).


I also put £250 into my SIPP (but not from my wage slip but from my bank account after the salary has been paid). The pension company claim back 20% tax relief for me.


what I don't understand is:-


1) I don't get why the 20% tax relief the pension company gets me equals £62.50 (20% of £250 is £50)
2) when I complete my self assessment will HMRC give me a cheque for 12months x £62.50 (£750) or will they just adjust my tax code

kidmugsy

singhini wrote: »

1) I don't get why the 20% tax relief the pension company gets me equals £62.50 (20% of £250 is £50)
2) when I complete my self assessment will HMRC give me a cheque for 12months x £62.50 (£750) or will they just adjust my tax code

1) Because 20/80 = 25%

2) Do you pay tax at the higher rate (40%)?

Zanderman

singhini wrote: »

what I don't understand is:-
1) I don't get why the 20% tax relief the pension company gets me equals £62.50 (20% of £250 is £50)

Basic tax is 20%. So basic tax relief is 25%.

E.g.
You earn £100 but pay tax. 20% is tax - leaving £80.
You get tax relief on the £80, which gives £20 back to make it back up to £100.
£20 is 25% of £80. Simples.

singhini

Ah Kidmugsy & Zanderman you are quite correct 80/20 = 25% (Im glad you put the £100 working example as it would not have made any sense).


Kidmugsy - yes I am a 40% tax payer (I want a cheque for £700 and not my tax code readjusted to be honest)

Shedman

singhini wrote: »

I'm confused


I have a SIPP (because my employer does not have a work based pension plan), rather they asked me to provide details on my personal pension plan nd thus I opened a SIPP so he could put money into it.
Employer put 7.5% into it (which he does, his contribution is correct to the exact penny).


I also put £250 into my SIPP (but not from my wage slip but from my bank account after the salary has been paid). The pension company claim back 20% tax relief for me.


what I don't understand is:-


1) I don't get why the 20% tax relief the pension company gets me equals £62.50 (20% of £250 is £50)
2) when I complete my self assessment will HMRC give me a cheque for 12months x £62.50 (£750) or will they just adjust my tax code

Re 2). If you normally submit a year end self assessment then what the tax man does is basically increase the level before you start paying 40% tax by the amount you have contributed (in your case 12x£250) so you will have overpaid tax as you will have paid at 40% on that £3000 but the tax calculation will work it out that you should have only paid at 20%. They normally send a refund cheque for overpayments and in my experience it's pretty quick once you have submitted the assessment