Approach to SIPPs

ColdIron

aroominyork wrote: »

4) You can make contributions going back three tax years using the earliest year first, so after maxing out my gross salary or £40,000 (whichever is the lower) for 2019/20, I can use up any unused allowance for 2016/17, then 2017/18, then 2018/19.

You can carry forward unused annual allowances from previous years (subject to some qualifying rules) but you are still subject to your annual earnings limit which cannot be carried forward.

• To use carry forward, you must make the maximum allowable contribution in the current tax year (£40,000 in 2018-19) and can then use unused annual allowances from the three previous tax years, starting with the tax year three years ago.
• You can’t receive tax relief on contributions in excess of your earnings in a tax year and you only receive higher rate tax relief to the extent that you have paid it.

https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/carry-forward

So if you earn £60K in this year that is the contribution limit (£40K + £20K), similarly if you earn less than £40K you cannot use carry forward at all.

Albermarle

I think you cannot make any useful deduction at all !

In hindsight it was perhaps a rather too simplistic question !

"active" means that someone is making ongoing decisions what to buy sell and hold. Whereas passive generally means just staying as you were.

Even on the 'passive side ' there are variations on a theme. Although clearly a 100% market tracker is passive . Multi asset funds or those managed to a risk level are normally also referred to as passive ,although there is an element of continuous rebalancing going on . Maybe they should be refererred to as 'Passively Managed' ?

aroominyork

If you are trying to define what is active and what is passive you should also think about factor funds - see this video which explains them well. (Edit: I would call factor funds passively active!)

aroominyork

Prism wrote: »

That will depend very much on the active fund. Towards the end of last year for example my growth active funds (SMT, Merian UK Mid cap etc) fell around 20% which was much worse than their index. My more defensive active fund (Fundsmith) held up well against the index.

Everything is relative so while Fundsmith (FE 132) might seem defensive compared to SMT (FE 183) I would be very careful about describing it as a defensive fund. It is my largest single holding by some distance, but I sprinkle salt liberally when hearing Terry Smith at the AGM saying how pleased and surprised he is by its performance in a bull market when it is better positioned for a downturn. That said, I sincerely hope he's right.

jamesd

aroominyork wrote: »

1) Each year you can pay in the amount of your gross salary up to a maximum of £40,000. This includes employee’s and employer’s payments into a workplace defined contribution scheme.

Wrong. You can pay in gross up to your gross salary. Your employer can pay in as much as they like. Employer contributions don't count towards the salary limit.

You're making the mistake of combining the salary lmit and the annual allowance and you must not do that because they are separate limits.

Once the total employee and employer contribution for the year is known, it's checked against the annual allowance. If it's under 40k no problem. If it's over 40k look three tax years back and add the unused amount from that year to the 40k. Still not enough? Add from two years ago and if necessary last year. If the total contribution for the year is higher than 40k plus unused annual allowance for the last three years tell HMRC the excess and they will make an annual allowance charge.

aroominyork wrote: »

2) It is calculated gross so if you are a basic rate taxpayer you can pay in a max of £32,000. If you are a higher rate taxpayer you can still pay in £32,000 but as well as this being grossed up to £40,000 you can reclaim £8,000.

Right for personal contributions. Basic rate relief goes into the pension, higher rate's extra is paid to you, via HMRC increasing your basic rate band by the gross contribution amount.

Employer contributions don't get extra added.

aroominyork wrote: »

3) SIPP contributions can be grossed up with tax you have not paid, eg if you earn £40,000 with a personal allowance of £12,500, you pay 20% tax on £27,500 = £5,500. However you can pay £32,000 into a SIPP and it is grossed up by £8000 to £40,000.

Your personal allowance and income tax rate are irrelevant and not used when calculating what you can pay in. At 40k you can pay in 40k * 0.8 and that will be grossed up to 40k. At 100k you can pay in 100k * 0.8 and that will grossed up to 100k inside the pension. At 12.5k you can pay in 12.5k * 0.8 and that will be grossed up to 12.5k inside the pension. Yes, you are entiitled to penion tax relief on money within the personal allowance.

aroominyork wrote: »

4) You can make contributions going back three tax years using the earliest year first, so after maxing out my gross salary or £40,000 (whichever is the lower) for 2019/20, I can use up any unused allowance for 2016/17, then 2017/18, then 2018/19.

Wrong, you're combining salary and annual allowance limits and must not. If your salary is 40k you're not allowed to make personal contributions that exceed 40k * 0.8 in the current tax year. To use any annual allowance carry forward you must have earnings for the year above 40k or employer contributions as well as your own.

To get correct answers you must calculate the earnings and annual allowance limits independently.

If you go over the earnings limit the pension scheme will refund the excess to you when they learn about it. If you go over the annual allowance plus carried forward allowance HMRC will make an annual allowance charge on the excess.

darkidoe

jamesd wrote: »

You're making the mistake of combining the salary lmit and the annual allowance and you must not do that because they are separate limits.

Once the total employee and employer contribution for the year is known, it's checked against the annual allowance. If it's under 40k no problem. If it's over 40k look three tax years back and add the unused amount from that year to the 40k. Still not enough? Add from two years ago and if necessary last year. If the total contribution for the year is higher than 40k plus unused annual allowance for the last three years tell HMRC the excess and they will make an annual allowance charge.

If you go over the earnings limit the pension scheme will refund the excess to you when they learn about it. If you go over the annual allowance plus carried forward allowance HMRC will make an annual allowance charge on the excess.

Very useful explanation! Thanks!

So basically there are 2 limits to how much you can pay into a pension per year.
1) Earnings limits (yearly) - You cannot pay into a pension more than your earnings in that financial year.

2) Annual Allowance limits (which can be carried over from unused allowance over the last 3 years) - If your yearly earnings are more than the annual allowance and you want to pay in more into your pension above the annual allowance, unused allowances from the previous 3 years can be taken into account.
If you go above the limit of the 'annual allowance rules', there will be taxes on the amount over the allowance limits.
(Personally I think this is an unlikely scenario for the majority of people)

ColdIron wrote: »

[*] You can’t receive tax relief on contributions in excess of your earnings in a tax year and you only receive higher rate tax relief to the extent that you have paid it.

I suppose 'you can only receive higher rate tax relief to the extent you have paid it' in that year? (i.e. you don't carry forward the higher rate tax relief bit from previous year that you paid high rate tax)

jamesd

Right.

The increase in basic rate band by the gross value of the personal contributions that ends up in the pension scheme in the tax year only affects that tax year.

If you need something that affects the previous tax year, EIS purchases can be allocated that way. But those are unsuitable for most people.

londoninvestor

darkidoe wrote: »

So basically there are 2 limits to how much you can pay into a pension per year.
1) Earnings limits (yearly) - You cannot pay into a pension more than your earnings in that financial year.

2) Annual Allowance limits (which can be carried over from unused allowance over the last 3 years) - If your yearly earnings are more than the annual allowance and you want to pay in more into your pension above the annual allowance, unused allowances from the previous 3 years can be taken into account.
If you go above the limit of the 'annual allowance rules', there will be taxes on the amount over the allowance limits.
(Personally I think this is an unlikely scenario for the majority of people)

Note that (1) is a limit on how much you can pay in, (2) is a limit on how much you plus your employer can pay in.

See the "Check how much annual allowance you've used" section here:
https://www.gov.uk/tax-on-your-private-pension/annual-allowance

aroominyork

Can I please check I understand this?

i) Say I earn £60,000; I pay 5% (£3,000) into my workplace pension and my employer pays in 6% (£3,600).

ii) I have an earnings limit of £60,000 gross after basic rate tax is reclaimed. So I can pay into my SIPP another £60,000 - £3,000 = £57,000 gross, a net contribution of £45,600. The higher rate tax I reclaim does not figure in these calculations.

iii) I have an annual allowance of £40,000. £6,600 comes from the workplace contributions. That leaves £33,400 gross, or £26,720 net contribution, on which tax can be reclaimed out of this financial year’s allowance.

iv) Carry forward: I can reclaim tax on £45,600 - £26,720 = £18,800 contributions using carry forward from the last three years. £18,800 net is £23,500 so that is the amount that I need to have available to carry forward.

Is that right?

jamesd

I'm assuming that the £3,000 you pay at work is gross, not net. It could be either,, depending on how the work scheme is set up. I'm assuming that work isn't operating a salary sacrifice scheme.

You report the gross personal pension contributions and the amount by which you've exceeded the available annual allowance from all available years to HMRC separately. You can both get higher rate tax relief (higher basic rate band) an pay annual allowance charge (higher income for tax calculation) in the same year.

i and ii are correct. ii and iv are somewhat wrong, don't try to combine pay/tax relief and annual allowance. You just tell HMRC the gross contribution by you for the year and the excess, if any, above the available allowance. But the amounts in iii and iv are right. What you really do is:

1. tell HMRC the combined £57,000 of gross personal contribution and
2. tell HMRC nothing bout annual allowance if you had enough or £60,000 - (available current and past year allowance) if you didn't have enough.