40% pension contribution questions

AnotherJoe

arrgee wrote: »

It is possible to pay all your earnings into a pension and not pay any tax (or NI or emplyers NI) at all. But as you wouldn't use you tax free allowance it makes little sense. So just pay everything over £11.5K

I dont believe thats correct. AFAIK even if you earned (say) £10k in a year, eg under the tax threshold, you could still put £8k into a SIPP and get £2k added on top as "tax relief" even though you paid no tax on your income.

cloud_dog

Dazed_and_confused wrote: »

No, a payment into a SIPP or personal pension merely increases the amount of the basic rate tax band i.e. how much income can be taxed at 20%.

It doesn't reduce the amount of taxable income.

Hi, not sure if this is just a confusion around words (on my part) but...

For a 40% tax payer making payments in to a SIPP, they 20% is added by the pension provider and the HRT payer will claim the additional tax via self assessment.

Additionally, I believe if you confirm with the Tax Man that this is an ongoing payment (amount) they will adjust your PAYE code accordingly to take in to account the HRT aspect going forward.

Dazed_and_confused

Cloud_dog

That sounds about right but the actual way you get the tax relief is by the payment increasing how much 20% tax you pay which in turn reduces how much 40% tax you pay

Very simple example,

Without a SIPP contribution you would have
£32000 taxed at 20% = £6400
£5000 taxed at 40% = £2000
Total tax £8400

With a £3000 (gross amount) SIPP contribution that would become

£35000 taxed at 20% = £7000
£2000 taxed at 40% = £800
Total tax £7800

Your taxable income (after Personal Allowance) remains £37000.

The extra tax relief received is £600 (8400 - 7800) which is the extra 20% of your gross contribution.

Overall you actually gave the pension company £2400 and got a tax benefit personally of £600 so net cost £1800 but you now have £3000 in your pension fund :money:

donaldtramp

Hi guys,
In this instance I am talking about a one off PaYment into a SIPP.
From what I see from my sons pension (he's nearly 19 months old now and very financially savvy) the 20% is automatically added by the pension provider.
So in order to claim back the remaining 20% I would need to do this on a tax return.
So for an arbitrary picked 50k. Would I pay in (A)7k or (B)5.6k (7k minus 20%)? Then claim back the other 20% by tax return.

donaldtramp

I think to totally mitigate higher rate tax in Scotland for a 50 salary the answer would be the 5.6k contribution to a SIPP. Is this right?

Dazed_and_confused

Your salary isn't relevant here it's your taxable pay i.e. pay figure which will be on your P60 plus any other taxable income you have in the year such as savings interest (which other than normal exclusions like ISA's is all still taxable even though no tax is deducted by the banks now).

Once you know your income (or accurate estimate of it) you can then determine how much will be taxed at the 40% rate.

You don't always need to complete a tax return just for this and cannot claim "the other 20%". Whether by a tax return of HMRC calculation the SIPP payment is taken into account when calculating your overall tax position for the year. The chances of you getting exactly 20% back is extremely slim.

£5.6 net would be grossed up to £7k by the pension company and this would in turn increase the amount of 20% tax you can pay by £7k.

donaldtramp

Hi d&c,
For me it'll be challenging. As I have property that I rent out, I need to do a tax return. I suppose I'll just have to total it up and estimate what it will be by the end of the year.
I'll just have to total up the income for the year as you say and get ready to make a SIPP contribution to limit the 40% tax rate as much as I can.

Cheers
DT

bigadaj

donaldtramp wrote: »

Hi d&c,
For me it'll be challenging. As I have property that I rent out, I need to do a tax return. I suppose I'll just have to total it up and estimate what it will be by the end of the year.
I'll just have to total up the income for the year as you say and get ready to make a SIPP contribution to limit the 40% tax rate as much as I can.

Cheers
DT

It's not that challenging, minor errors simply mean you may end up paying a few quid at 40%, or alternatively only get 20% tax relief on a few quid, it's not life changing.

CRAIGSVILLE

http://www.thesalarycalculator.co.uk/salary.php


good calculator :-)