SIPP vs ISA vs Workplace Pension

adavb

Thank you so much for all the advice. I have been sufficiently made aware to move investments into my SIPP and benefit from the tax savings.
I do realise that my pot is low and I will need to boost this asap.

Hopefully other people in a similar situation may benefit from this post too.

Azammehmood

AnotherJoe wrote: »

ISA savings is only tax free upon withdrawal. If you put £100 in your ISA, then as a higher rate taxpayer you earned about £200 to get that. So it's cost you £100 in tax. (You'll lose 40% tax plus some NI so roughly £100). So when you say you can withdraw it tax free that's really because youve already paid the tax in advance !
If you put that £100 in a SIPP then the SIPP provider will claim back the 20% tax automatically which bumps the sum up to £125 (because £125 - 20% = £100). When you claim the £125 contribution on your tax return, HMRC will refund £25 to you, meaning the £125 in your SIPP cost you £75.
Assuming as a retired person you are paying 20% tax, when you withdraw the £125, 25% is tax free and the remainder is at 20% tax so that's roughly £106 you get that cost you £75. Which is equivalent to £100 paying you £141. That's a lot better than the £100 you'd get out of your ISA.
If you put your money into the company pension the calculations are the same except you just don't pay the tax in the first place, don't need to claim it back via tax return and if the company does salary sacrifice you don't pay the NI tax either so you'll get about 12% back on top.

If you put your money into the company pension the calculations are the same except you just don't pay the tax in the first place, don't need to claim it back via tax return and if the company does salary sacrifice you don't pay the NI tax either so you'll get about 12% back on top. I think in company pension if you're higher tax payer then you'd still need to submit a tax return to claim that additional tax benefit, please correct me if I am wrong as I am having some confusion.

atush

You dont need to do a tax return if you have no other reason to.

A call to HMRC telling them about the pension contribution will suffice

Linton

Azammehmood wrote: »

If you put your money into the company pension the calculations are the same except you just don't pay the tax in the first place, don't need to claim it back via tax return and if the company does salary sacrifice you don't pay the NI tax either so you'll get about 12% back on top. I think in company pension if you're higher tax payer then you'd still need to submit a tax return to claim that additional tax benefit, please correct me if I am wrong as I am having some confusion.

You are slightly confused:
There are two ways a company pension scheme can handle employee contributions. The names used for these seem very confusing:

"Net Pay" - Your contributions are taken from your gross pay prior to the tax calculation. In this case you are never charged tax on your pension contributions in the first place and so do not receive any refund.

"Relief at source" - Your are taxed on your gross pay and then the pension contributions are deducted. So you are contributing from taxed income. HMRC refund the 20% basic rate tax directly into your pension but the higher rate 20% needs to be reclaimed via your tax return. This is equivalent to you paying into a private pension.


The overall result is the same. Large employers generally use "Net Pay".


Salary sacrifice is different in that "your" contributions are actually extra employer contributions covered by a reduction in your salary.

Albermarle

Just to add to the above>
When you make an extra payment /lump sum payment from your own savings /bank account, the pension company should add 20% automatically as tax relief .
In the case that your company is operating a 'net pay ' or salary sacrifice arrangement for your regular payments from payroll , they may have a problem adding the 20% back on for separate personal contributions for admin reasons. Best to check with them first.