On the edge of the higher rate - private pension question

newfoundglory

Hello everyone

My salary has been on the boundary of the higher rate for the last few years (and I have technically crossed it for the last two tax years). But this year I won't cross the higher rate based on my basic salary or savings interest.

I have been thinking about a second private pension (SIPP), of which I want to claim 40% relief.

If my salary and savings don't take me over the high rate: if I generated enough income from a rental property to take me over the 40%, could I then claim relief at 40% on the SIPP pension contributions?

Thanks

Dazed_and_confused

You don't actually claim "40% relief".

You include the pension contribution on your tax return and this increases the amount of basic rate tax you can pay which, if you have sufficient income, in turn reduces the amount of higher rate tax payable.

This forms part of your Self Assessment calculation so could minimise your Self Assessment tax liability rather than actually result in a tax refund.

It is sometimes possible to do this without completing a return but in the circumstances you have outlined a return is likely to be required.

Dazed_and_confused

Not quite sure what you mean by "technically crossed it"

newfoundglory

Oh ok, salary under but savings interest taking me just over the limit.

I guess what I'm asking is, does rental income count the same as salary in terms of what you can claim back from pension contributions. Im looking at small contributions which I think would only be worth it at the 40%

Dazed_and_confused

Providing you have sufficient earned income (taxable wages, self employment etc but not rental or pension income) to make the pension payment in the first place then yes you should be fine.

If you only had rental income and no taxable wages or self employment then you would have problems as you couldn't contribute to the pension in the first place.

newfoundglory

So my strategy (I already have a workplace pension), is to open a SIPP and put in £80 a month. My understanding is:
- this should be £100 a month, as i will automatically get 20% on top of my 80
- if I was earning taxable income of about £43k per year but getting £6k of rental income then I should be able to get back 20% on what I had contributed

sheramber

You don't get anything back.

You get an additional amount of income charged at 20% rather than at 40%.

Dazed_and_confused

As Sheramber says this type of pension contribution simply increases the amount of basic rate tax you can pay.

The best way for you to see the benefit is to complete your Self Assessment return with all income but don't include the pension contribution. They print off a copy of the tax calculation.

Then add in the pension contribution and print off the updated calculation (and file the return!).

Compare the calculations and you can see how much tax the pension contribution has saved you.