Reducing tax by putting money into SIPP

singhini

I will try to keep this simple. I am a 40% tax payer and I was moaning I pay too much tax (friend said easy, just put lump sum into your SIPP). My issue is I don’t really understand pensions. Currently I’m putting £9,000 (ish) into various pensions annually (this amount includes my money + employer contributions + tax relief).

Anyhow, I just want to check my maths and understanding is correct please:
Let’s say I earn £60,000, my tax bandings will be:
£11,500 is tax free
£33,500 is taxed at 20% (£6,700 paid in tax)
£15,000 is taxed at 40% (£6,000 paid in tax)
Total tax liability £12,700

But if I put a lump sum of say £12,000 into my SIPP from my bank account, the pension company claim back 20% tax relief which is £3,000 and this money gets added to the SIPP thus my SIPP goes up by £15,000
I then do self-assessment aswell and tell HMRC that I put £12,000 into my SIPP and thus they change my tax bandings as follows
£11,500 tax free
£48,500 is now taxed at 20% (£9,700 paid in tax)
£zero is now taxed at 40%

Total tax liability now is £9,700 (and I’m no longer a 40% tax payer and so I shouldn’t be tax 40% on my company car).

Is this right?

[Deleted User]

Your calculations are correct BUT you must also include the value of the benefit in kind which is your company car if not already in the £60000.

Also, how are you treating your current pension provision in your calculation?

Nevertheless, you have indeed grasped the basic concept that your tax liability will reduce by £3000. £15000 has gone into your pension fund and it has, in effect, cost you £9000.

singhini

[Deleted User] wrote:

Your calculations are correct BUT you must also include the value of the benefit in kind which is your company car if not already in the £60000.

Also, how are you treating your current pension provision in your calculation?

Nevertheless, you have indeed grasped the basic concept that your tax liability will reduce by £3000. £15000 has gone into your pension fund and it has, in effect, cost you £9000.

Thank-you for your quick response, really appreciated.


I hadn't thought about the BIK affecting the £60,000 (assuming the BIK is £1,200 annually then I should be readjusting the £60k to £61,200 ?)


Again I haven't considered my current pension provision in my calculations (as I don't know what that really means ?)

Previn

singhini wrote: »

Thank-you for your quick response, really appreciated.


I hadn't thought about the BIK affecting the £60,000 (assuming the BIK is £1,200 annually then I should be readjusting the £60k to £61,200 ?)


Again I haven't considered my current pension provision in my calculations (as I don't know what that really means ?)

That £1200 figure is I assume the tax you currently pay on a company car. The benefit in kind figure you should use will be on your P11D annually but is likely to be at least £6k depending on the car of course.

singhini

Previn wrote: »

That £1200 figure is I assume the tax you currently pay on a company car. The benefit in kind figure you should use will be on your P11D annually but is likely to be at least £6k depending on the car of course.

Thanks - Good point, the BIK will be on the P11d (I got the car in June this year and so will need to wait P11d when it comes next year).


I have guessed the P11d is £3,100 (its a hybrid, costs £34,900 and BIK rate in this tax year is 9% and I'm a 40% tax payer).


I will need to seriously think about putting a good chunk into my SIPP since i could save another £600 in relation to the company car by dropping out of the 40% tax bracket (so that's £600 ontop of the £6,000 ive saved by doing the SIPP pension contribution).

[Deleted User]

singhini wrote: »

Thank-you for your quick response, really appreciated.


I hadn't thought about the BIK affecting the £60,000 (assuming the BIK is £1,200 annually then I should be readjusting the £60k to £61,200 ?)


Again I haven't considered my current pension provision in my calculations (as I don't know what that really means ?)

What I meant was that your £60000 figure may be your gross salary but could be before pension contributions in any company scheme. If, for example, you pay 5%, your taxable salary is £57000, not £60000. Additionally you had also mentioned that you already contribute £9000 per annum including 'my money' - this should also be taken into account.

singhini

[Deleted User] wrote:

What I meant was that your £60000 figure may be your gross salary but could be before pension contributions in any company scheme. If, for example, you pay 5%, your taxable salary is £57000, not £60000. Additionally you had also mentioned that you already contribute £9000 per annum including 'my money' - this should also be taken into account.

Ah OK, I currently pay 1% into my company pension and my employer pays 7.5% (so my 1% is £600 and company paying £4,500).


I also pay £250 x 12 months into my own SIPP (and pension company claims back £62.50 x 12 months: so that's £3,000 + £750)
So what ypur saying is my taxable salary would be £60,000 less £600 (but the BIK on the car would force the taxable salary up from £59,400 + £3,100 = £62,500)


And I need to take into consideration lots of other things like Gift aid, Interest earn't on bank account savings above my £500 allowance, Money from share dividends above the £5000 allowance, job expenses etc.........


This is why I cant work out exactly how much I should put into the SIPP so I no longer become a 40% tax payer (its too complicated).


But I do appreciate your comments (and from Previn)

Dazed_and_confused

Interest earn't on bank account savings above my £500 allowance, Money from share dividends above the £5000 allowance,

It isn't as simple as that. There are no "allowances", that income is still taxable and is taken into account but it's possible that £500 (interest) and £5000 (dividends) get taxed at a 0% rate.

As it is still taxable income it can mean you have a higher tax bill overall even though 0% tax is due on that particular income.

xylophone

https://www.gov.uk/tax-on-dividends

https://www.itcontracting.com/dividend-allowance-cut-2018/

singhini

Dazed_and_confused wrote: »

Interest earn't on bank account savings above my £500 allowance, Money from share dividends above the £5000 allowance,

It isn't as simple as that. There are no "allowances", that income is still taxable and is taken into account but it's possible that £500 (interest) and £5000 (dividends) get taxed at a 0% rate.

As it is still taxable income it can mean you have a higher tax bill overall even though 0% tax is due on that particular income.

That's a really good point, HMRC will add all money from interest to my total earnings and then stick -£500 at the bottom of the calculation sheet.

singhini

xylophone wrote: »

https://www.gov.uk/tax-on-dividends

https://www.itcontracting.com/dividend-allowance-cut-2018/

Thanks - I didn't realise the allowance on dividends was changing


The dilemma I have is I want to cut my tax bill and be more tax efficient, but with pensions (which I think is probably the best place to help me achieve this) the money gets tied up until I'm 55 at the earliest and future government policy might change this.