HRT Payer SIPP Contribution Calculation

fluffyanimal

Hi.... This may be a naive question but...

I'm a HRT (40%) payer and am looking to make additional contributions in to a SIPP.

I understand that:

1. Pension contributions are based upon the gross figure
2. The pension provider is able to automatically add 20% (from the 40%) as standard

So, if I contribute £120 this is an actual contribution of £200 (just to make the maths easy.

So I deposit £120.
Provider adds £30 (as standard 20%).
I recover the remaining £50 as tax relief via Self Assessment.

Assuming my assumptions are correct, what value do I enter in to the Self Assessment form; I am assuming it is the grossed up value £200 which when I do the math calculates 20% as £50.

So that makes £120 + £30 + £50 = £200
Which is the same as
£120 / 60 * 100 = £200

Linton

No - the important number is how much goes into your pension. Work everything out from that.

In your example your pension gets a gross contribution of £150. Of that £30 comes from HMRC as a basic rate tax refund and £120 from you. Then, as part of the year end tax calculation (or possibly earlier if you inform HMRC), HMRC refund to you the 20% of £150 =£30 HRT you paid on the gross contribution. The amount you report on your tax return is £150.

fluffyanimal

Linton wrote: »

...HMRC refund to you the 20% of £150 =£30 HRT you paid on the gross contribution. The amount you report on your tax return is £150.

So that works out as £37.50

So, as a HRT payer I do not get 40% on my (overall) contribution?

If you assume £120 is 60% then 100% = £200. I appreciate my 'focus' (assumption) may be invalid.

But based on how relief is calculated I end up with £187.50. So, in essence my 'holistic' benefit is 36% not 40% due to how and what figures are used for tax relief calculation.

PensionTech

So that works out as £37.50

No, it doesn't - HMRC refund 20% of the grossed-up £150, so £30.

So, as a HRT payer I do not get 40% on my (overall) contribution?

Yes you do, but you are getting confused about what your contribution actually is. Your contribution is what ends up in the pension scheme. The 40% relief means that the eventual cost to you of making that contribution is only 60% of the sum that ends up in the pension scheme.

If you assume £120 is 60% then 100% = £200.

Yes, but that's not the 60%. £120 is 80% so 100% = £150 that goes into your pension pot after it's been grossed up by the provider. You pay £120 and get £30 back through SA so your cost is actually only £90. £90 / 60% = £150.

If you want £200 to be put into your pension pot you need to pay £160. Then you'll get £40 back through SA and your cost will have been £120, which satisfies your £120 / 60% = £200.

Linton

No - think again.

£150 gets into your pension. So HMRC have to refund the tax you paid on £150. £30 goes back to you, £30 goes into your pension the other £120 coming from you. Lets look at what is the net effect:

You get £150 into your pension. You paid £120-£30=£90 from taxed income . £90=60% of £150.

You cant expect tax relief on the £30 that is paid to you!

fluffyanimal

Ok, as sad as it is I am still struggling

Linton - Can you give me a total value figure, irrespective of where the amount valiue comes from (tax relief etc)?

I deposit £120

The total credited to me (via deposit and TR) is.... £???.??

EDIT: Re-reading post #5, the total 'overall' value is £180.00
Is that correct?

PensionTech

If you pay £120 up front, the amount that goes into your pension is £150, but you'll then get a rebate of £30. So you'll have paid a net contribution of £90 to get £150 into your pension pot.

But do note that this technically means you've "deposited" i.e. paid £90, not £120, so read the below as well:

If you pay £160 up front, the amount that goes into your pension is £200, but you'll then get a rebate of £40. So you'll have paid a net contribution of £120 to get £200 into your pension pot.

You need to understand that the amount you "deposit" is effectively reduced by the fact that you get a rebate afterwards. So what Linton said in the first place is spot on - it's easier to understand if you stop focusing on your initial payment, and think in terms of what goes into your pension instead.

fluffyanimal

Thanks both for your posts. That makes sense (in my fuddled mind).

NoMore

I think where you are getting confused is the rebate for the higher rate tax, does not go directly to your pension unlike the 20% rebate. Its paid directly to you by HRMC, they can either adjust your tax code or just pay you the rebate.