What happens if you contribute too much to a SIPP

JohnB47

Hi.

I'm at the point of working out how much to contribute to my wife's cash SIPP. She has estimated her 'end of tax year' taxable income (£8162).

I'm just wondering - if she turns out to not earn as much as she expects, say from illness (she is self employed), what happens?

Is there some sort of procedure you can go through, with the SIPP provider (HL) and/or the tax people?

Edit: sorry I for got to mention that we see this as a way to pay the maximum possible into her SIPP. We have other sources of income.

Thanks.

redux

I don't know if it is exactly how it works in practice, but you could read this thread

https://forums.moneysavingexpert.com/discussion/5788406

- in particular my reply in post 11, quoting and linking gov website.

redux wrote: »

I found this

https://www.moneyadviceservice.org.uk/en/articles/tax-relief-on-pension-contributions

You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you get on your pension contributions.
...
If you're a UK taxpayer, in the tax year 2017-18 the standard rule is that you'll get tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower.

For example, if you earn £20,000 but put £25,000 into your pension pot (perhaps by topping up earnings with some savings), you'll only get tax relief on £20,000.

But it would be nice to find something similar on a gov website too, so

https://www.gov.uk/tax-on-your-private-pension

Limits to your tax-free contributions

You usually pay tax if savings in your pension pots go above:

100% of your earnings in a year - this is the limit on tax relief you get
£40,000 a year - check your 'annual allowance';
£1 million in your lifetime - this is the lifetime allowance

and on page 2

It's up to you to make sure you're not getting tax relief on pension contributions worth more than 100% of your annual earnings. HM Revenue and Customs (HMRC) can ask you to pay back anything over this limit.

. I wish MSE would fix this odd apostrophe glitch. Hmm, editing may have helped.

But anyway, it sounds like your answer would be for instance earn £9000, pay £8,000 net pension contribution, scheme claims £2000 to make £10,000 gross, contact HMRC and say oops, tax bill £200. Or no earnings, net contribution £4000, scheme claims £1000 so £5000 gross, contact HMRC, tax bill £280. Whether it is as smooth as that, I have no idea.

But is it actually worth doing this? I would assume that without the tax relief the pension fund is about akin to an ISA for performance, why not an ISA instead? Or is this as well?

Thrugelmir

JohnB47 wrote: »

Is there some sort of procedure you can go through, with the SIPP provider (HL) and/or the tax people?

You need to inform your provider. Alternatively submit your self assessment return promptly.

If you exceed the allowance

If you exceed the annual allowance in a year, you won't receive tax relief -on any contributions you paid that exceed the limit and you will be faced with an annual allowance charge.

The annual allowance charge will be added to the rest of your taxable income for the tax year in question, when determining your tax liability. Alternatively, if the annual allowance charge is more than £2,000, you can ask your pension scheme to pay the charge from your benefits. This means your pension scheme benefits would be reduced.

Unless you have a money purchase annual allowance (MPAA), you may be able to bring forward any unused annual allowances from the previous three tax years, to either reduce your annual allowance charge to a lower amount or reduce the annual allowance charge completely.

https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/the-annual-allowance