Can I pay towards my wife's pension tax free?

Omega1

My wife and I are both working. I hope my pay will increase considerably soon. I am planning to start paying £40k/year towards my pension pot (I believe I have SIPP). Then, when I am 55 (I am 43 now), withdraw the money and pay my mortgage - if I understand correctly, I can withdraw the money, but from the withdrawn amount I get only 25% cash tax free and I must buy with pension with 75% of the withdrawn money. Is it correct or I do not understand something?
Also, I was wondering if I could contribute some of my pay towards the pension of my wife? And if I do it, will I pay tax on the money put towards her pension? I believe she has SIPP as well
Thank you

Dox

No, you don't need to buy a pension with the other 75% - but you will need to pay tax on it at your marginal rate.

If you pay money into your wife's SIPP, the money will come out of your post-tax income. The SIPP provider will claim basic rate tax relief and add it to her SIPP. If she is a higher rate taxpayer she can claim any further tax relief for which she is eligible through her tax return - you can't claim any sort of tax relief yourself.

Omega1

Thanks for clarification.
I don't know anything about the tax on the marginal rate. Could you tell me how it is calculated? Or refer me where it is explained in simple terms?
About my wife's contribution - let's say I pay 40% tax because I get over £46k and then NI and my wife is at the lower band (she is between £12-46k). So, once I get paid my salary, I can give her cash and she will put it towards her pension and ask SIPP provider to claim 20% tax that will be put into her pension pot?
Thanks again

kidmugsy

Omega1 wrote: »

About my wife's contribution - let's say I pay 40% tax because I get over £46k and then NI and my wife is at the lower band (she is between £12-46k). So, once I get paid my salary, I can give her cash and she will put it towards her pension and ask SIPP provider to claim 20% tax that will be put into her pension pot?
Thanks again

The usual assumption is that your best bet is to contribute enough to your own pension to let you avoid 40% tax. As an illustration: suppose in tax year 18/19 you earn £96,350. Then you'd like to there to be a "gross contribution" of £50k to get your income down to the higher rate threshold i.e. £46,350. (Note that I assume that you have no taxable income except your earnings).

Suppose that you and your employer will automatically contribute £5k. Therefore you will want to choose to contribute another £45k gross. Your annual allowance for contributions is £40k. You use that plus another unused £5k carried forward from the previous three tax years starting from the oldest first i.e. from 15/16.

Because it is a SIPP you are contributing to, you send your provider the net amount which is 80% of the gross i.e. 0.8 x £45k = £36k. The provider will automatically claim tax rebate of £9k from HMRC and add it to your "pot". Note that that tax rebate equals 20% of the gross £45k.

Now you inform HMRC that you have made a gross contribution of £45k (NOTE: you must tell them the GROSS contribution) and they will refund to you a further £9k, because you had paid higher rate tax on the £45k and so you are due 40% less the 20% that's already been sent to your provider, = 20%. That refund would either be direct to you or indirectly by their adjusting your tax code. Note that your contribution must be made before the end of the tax year i.e. on or before 05 April 2019.

As for your wife: yes, you give her the money to make her own contribution and then her provider claims the tax rebate for her. Note that if her employer offers pension contribution by "salary sacrifice" (also known as "salary exchange" or "smart pension") then it would be best for her to use that because not only will she avoid income tax, she will also avoid 12% National Insurance Contribution.

Paul_Herring

Omega1 wrote: »

Thanks for clarification.
I don't know anything about the tax on the marginal rate. Could you tell me how it is calculated? Or refer me where it is explained in simple terms?

Treat any pension income as if it was wages. Anything that would be taxed at 20% if it were wages, would be taxed at 20% if it was pension. Ditto the 40% band.

So, from https://www.gov.uk/income-tax-rates (and assuming you have a normal tax code):
your first £11,850 doesn't get taxed.
Anything from £11,851 to £46,350 gets taxed at 20% (leaving the first £11,850 still not touched)
Anything over (and only over) £46,350 gets taxed at 40%.

The 'marginal rate' is the maximum of that lot that you get taxed. So if you get, in total from wages and/or pension, £25,000, your marginal rate is 20%, and any extra (up to £46,350 of course) will get taxed "at your marginal rate", i.e. 20%.

About my wife's contribution - let's say I pay 40% tax because I get over £46k and then NI and my wife is at the lower band (she is between £12-46k). So, once I get paid my salary, I can give her cash and she will put it towards her pension and ask SIPP provider to claim 20% tax that will be put into her pension pot?

Basically, yes. What you can't do (which Dox was elucidating) is if you're a 40% taxpayer, and your wife only a 20% taxpayer, is expect to claim 40% relief that was paid, for yourself, since it's based on your wife's tax band (which is 20%.)

Omega1

Ok. Thanks a lot.
More questions, please:
1. Let's say I will accumulate £300k in my pension by the age of 55 and decide to withdraw everything. Does it mean that £75k (25%) I get tax free, and how much tax I will pay on the remaining money? If I am in 40% band, will I pay 40%?
2. Can I move part of my pension pot to my wife tax free? Let's say £100k? And then if my wife withdraws it, and she is getting, let's say, £40k/year salary, then £25k she will get tax free, but how much will the other £75k be taxed? Will they be all taxed 20% because she at the lower band, or £6k will be 20% and the remainder at 40% because she reaches £46k band (well, I realise it will change in future, but let's keep current figures to simplify the case)?
Thanks again

Dox

1. Yes.
2. No.

kidmugsy

Omega1 wrote: »

1. Let's say I will accumulate £300k in my pension by the age of 55 and decide to withdraw everything. Does it mean that £75k (25%) I get tax free

Yes

Omega1 wrote: »

and how much tax I will pay on the remaining money? If I am in 40% band, will I pay 40%?

You'll pay 40% up to £100k taxable income for the tax year (or whatever the threshold then is), then you'll have the 60% band, then another 40% band, and then most of it will pay in the 45% band. In other words: it's a rotten idea, don't do it. After the 25% lump sum, draw the rest gradually, probably after you've stopped earning, to keep the tax bill down.

Omega1 wrote: »

Can I move part of my pension pot to my wife tax free?

No. Though you can gift her your £75k so that she can make pension contributions for several years in a row.

Omega1

Thanks. Seems to be complicated. Where could I read about these taxes and bands to get a better idea?

xylophone

https://www.litrg.org.uk/tax-guides/pensioners-and-tax/what-tax-position-when-i-take-money-my-pension-flexibly

might help.