Pension tax relief

OldBlade

Please could someone help clarify the position with regard to pension tax relief.

My wife (62) has a small pension of around £8K and with an allowance of 942H doesn't pay tax.

If she opens a SIPP what is the maximum I can pay into it in one tax year?

What I want to do is pay into the SIPP then withdraw all but that we need to keep it 'active' . She will pay tax on the withdrawal of course but at 20% so there will be a net gain.

TcpnT

Does she have any earned income in addition to the 8K pension? For her tax code to be lower than the full 1185 she must have some other taxable income - or the tax code is wrong?

OldBlade

She has a trivial additional pension some 30 per month but also owed some back tax.

Dazed_and_confused

H suffix tax codes have long since abolished so I think they might mean an N code (wife has applied for Marriage Allowance) or L code.

It might be possible to take some of the taxable part of the SIPP fund without having to pay any tax (or pay it then get it refunded). Need more information from the op though as tax code 942 and pension of £8k suggests there might be some spare allowances available.

MK62

OldBlade wrote: »

Please could someone help clarify the position with regard to pension tax relief.

My wife (62) has a small pension of around £8K and with an allowance of 942H doesn't pay tax.

If she opens a SIPP what is the maximum I can pay into it in one tax year?

What I want to do is pay into the SIPP then withdraw all but that we need to keep it 'active' . She will pay tax on the withdrawal of course but at 20% so there will be a net gain.

If your wife has no earnings, just pension income, then you can pay up to £2880pa into pensions, to which the govt will then add 25% (to give 20% relief on the gross amount), making £3600 max.

Most DIY pension platforms will hit you with big closure fees though if the balance goes below usually around £1000 in the first year, and even after that they may close the account if the balance drops below that minimum (and a smaller closure fee may apply, depends on platform), so you may need to plan to keep at least £1000 in the account.

If your wife's total pension is £8400pa (inc her "trivial" pension) and her personal allowance is effectively £9420, then she can draw £1360pa from the pension, and still pay no tax, as 25% of each withdrawal is tax free. (9420-8000=1020, then 1020/3*4=1360)

Have you looked into Marriage Allowance?
Depending on both your tax positions, it may save you a few hundred pounds a year, by transferring 10% of her Personal Allowance to you.

Also, if you decide to go down the SIPP route, be thorough in investigating all the charges you might have to pay, both account charges and withdrawal charges (if any), on the pension platforms you are looking at.

Dazed_and_confused

I have a feeling the wife has already applied for Marriage Allowance.

£11850 - MA (£1190) - trivial pension (£360) - tax owed (?) could easily equal 942H/L/N.

However tax code 942H/L/N and income of £8k means no tax would be being deducted so the underpayment wouldn't actually be being paid off

OldBlade

Aargh! Sorry, just remembered, I did grab 10% of her allowance for myself.

Dazed_and_confused

Going back to your original question,

If she opens a SIPP what is the maximum I can pay into it in one tax year?

To be honest I have no idea. But if she doesn't have any earned income from a job, self employment etc then your wife can pay in £2,880 and get the 25% tax relief uplift making it £3,600 in the fund.

Tax due on the taxable element of any withdrawal will depend on her circumstances in the tax year she takes it. Quite possible she will have to pay 20% (or 19% or 21% if Scottish resident for tax). Equally it might be possible to time it so she doesn't have any tax to pay.

Remember if she goes above her (reduced) Personal Allowance she will eat into the £5,000 savings starter rate available for taxable interest (savings interest taxed at 0%) although if she has enough income she will be able to make use of the savings nil rate band of upto £1,000 taxed at 0% (known as the Personal Savings Allowance)

OldBlade

OK, thanks for all your help.