Paying my wife's self employed income into a SIPPP

gadgetmind

Please check my thinking/working.

My wife is (just!) over 55 and has taken PCLS from her SIPP but nothing else.

My wife will earn around £6k this year from local government employment but has just resigned her job and is unlikely to seek employment in the future. She will also have around £10k from licensing some intellectual property, which we have always declared as self-employed income in the past. This is a "final rights buy out" type of thing so she's unlikely to see any future income from this.

I think she'll have Class 4 NI of £10k-£8.5k(ish) * 9%, so around £135.
She'll also have income tax of (£6k+£10k)-£12.5k=£3.5k * 20% so tax of around £700.

As her total earned income is £16k, she should be able to put £12800 into (her existing and quite healthy) SIPP, which HMRC will gross up to £16k, so an extra £3.2k.

She can then draw down SIPP in £12.5k tax free chunks for the next few years.

Sounds like she'd be mad to not use the SIPP to get tax back (and a bit more) but am I missing something? This whole getting tax relief on tax never paid that low earners can do has always seemed too good to be true.

zagfles

Could be considered recycling, depending on value of PCLS and what previous contributions were. Google "HMRC recycling rules".

Marcon

gadgetmind wrote: »

This whole getting tax relief on tax never paid that low earners can do has always seemed too good to be true.

Strange but true, in much the same way as mortgages used to give non-taxpaying students relief at source.

Paul_Herring

This whole getting tax relief on tax never paid that low earners can do has always seemed too good to be true.

It's just a natural extension of the £2,880 that a non-earner can contribute to gross up to £3,600.

Since there are likely, in practise, so few people in the position of (actually)
- earning under the personal allowance, who will also
- contribute the whole of their gross earnings into a pension[1] to get the rebate on wages not taxed,

I'm guessing it's not worth the effort to stick yet another rule in Tolly's to prevent it.


[1] or anyone who ends up contributing wages that would normally fall within the personal allowance.

gadgetmind

zagfles wrote: »

Could be considered recycling, depending on value of PCLS and what previous contributions were. Google "HMRC recycling rules".

Yup, have done, but it's all a bit vague. She's paid 100% of her income into pension for many a year, so she's just doing this with more income. PCLS is now all invested, and will remain invested, so we can argue that this one off fresh income is what's going into the SIPP.

gadgetmind

zagfles wrote: »

Could be considered recycling, depending on value of PCLS and what previous contributions were. Google "HMRC recycling rules".

Yeah, I did take a look, and all six conditions to be met. There was no pre-planning here as the £10k was a bolt from the blue, and additionally she has sufficient funds man time over (and did prior to PCLS) to make this contribution.

Albermarle

This whole getting tax relief on tax never paid that low earners can do has always seemed too good to be true.

You could look at this the other way as a kind of concession for low earners, as by far the main beneficiaries of the tax relief rules are higher earners claiming back 40% tax relief .

Paul_Herring

as by far the main beneficiaries of the tax relief rules are higher earners claiming back 40% tax relief

Debatable, depending on how it's looked at.

High earners are postponing tax on money they put in.

Low earners are getting extra tax 'refunded' that was never paid to begin with.

gadgetmind

Paul_Herring wrote: »

High earners are postponing tax on money they put in.

Low earners are getting extra tax 'refunded' that was never paid to begin with.

Well, quite. I'm paying tax at around 15% on my pension income (hard to know how to allow for PCLS but <12% if you include this) whereas my wife won't be paying any tax *and* gets a 25% uplift on what she put in.

In absolute terms, I'll be paying £7.5k pa and (assuming she drops down the the £2880pa contribution) she'll be paying *negative* £720 in tax pa.

Yes, a big concession for low earning, but this doesn't feel like a free ride for higher earners from where I'm sitting. On a more positive note, when state pension starts to arrive in 11+ years, it will cover my tax bill.