Tax relief on SIPP help needed

retireetobe

Please could someone confirm if I've grasped maximising the tax benefits on my husband's SIPP when we semi-retire next year. I've considered it for so long I've got confused.


Currently: Husband, age 61, is self-employed part-time as a sole trader, earning approx. £6000 per year. He has a SIPP with a current balance of £95K. The 25% TFLS has already been taken to fund house renovations, and last year tax year he drew down £5500 to use his annual tax free allowance. He will do the same this tax year. This income, along with my wage, has been enough for us to live comfortably.


In January 19 we will both semi-retire, intending to draw £1000 monthly (so £12K pa) from his SIPP to partially fund this. He will reduce his self-employed work and earn around £4000 per year. He will pay a small amount of tax due to this self-employment.


My question is: To date he hasn't been contributing to his SIPP. I know he should have been, but we haven't had the spare money. However, I think that from next year it makes sense to pay in the maximum allowable to get the tax benefits (his £4K annual self-employed earnings?), and then increase his monthly SIPP drawdowns from £1000 to around £1300 (I think??) to effectively get straight back the money he pays in. Does this sound right and, if so, how much better off will we be?


Thanks in advance for any input to help my brain fog.

xylophone

The Personal Allowance 2019-20 will be £12,500.


If his earnings for 2019-20 will be £4000, he can contribute £3200 to the SIPP and receive tax relief of £800.

This contribution creates an uncrystallised section of the SIPP from which he can take a tax free lump sum of £1000.


Any pension income over the £12,500 plus the £1000 PCLS from the new section would be taxable.

xylophone

Have you both obtained State Pension forecasts?

https://www.gov.uk/check-state-pension

clivep

To further clarify xylophone's reply...


An extra £3,200 in is grossed up to £4,000 with the tax relief.


£1,000 out is tax free.
£3,000 out will have £600 tax deducted giving £2,400 net.


So total received will be £3,600, a gain of £200 which is how much better off will you will be in the circumstances given where the personal allowance is already being fully used.

Aegis

Watch out if his earnings increase. As he has already drawn taxable benefits flexibly, he will be subject to the Money Purchase Annual Allowance, which means that £4,000 gross (see the excellent descriptions of what this means in other posts above this one) is the maximum tax relievable contribution possible regardless of earnings above this level.