SIPP tax relief

Worried_of_wakefield

Hi all, following excellent advice and shared information from this bb, I can report pots of HMRC funds have now arrived!

To ensure I max out contributions can you clarify if I can add further funds ( wifes sipp)

£11,850 pa less 10% transferred to me
£10650 adjusted pa
£10000 earnings from p/t self employment
£8000 already paid into sipp this year
£2000 tax relief arrived

Has she already hit max contribution or can we contribute a further £2000 without tax implications?

Spreadsheetman

Looks like you are at the earnings limit so can't contribute more and receive tax relief.

Worried_of_wakefield

Right, so the tax relief is added to earnings to give a new gross earning figure and therefore if both combined exceed her pa would then be subject to tax?

Tom99

The +25% tax relief is added to your net SIPP contribution, in your case £2,000 added to £8,000 to make your gross contribution of £10,000.
Since earnings are £10,000 you cannot pay any more into the SIPP until 6th April

enthusiasticsaver

No you are at the maximum. Tax relief plus contributions cannot be more than 100% of earnings.

dunstonh

Right, so the tax relief is added to earnings to give a new gross earning figure and therefore if both combined exceed her pa would then be subject to tax?

Pension contributions should always be worked on as gross contributions. Not net.

tax relief is not a bonus that is added. It is effectively a discount

£8000 already paid into sipp this year
£2000 tax relief arrived

That means you have paid £10,000 into the pension in this tax year. Do not refer to it as £8,000

BoGoF

And I assume the part time earnings figure of £10,000 is net profit and not turnover?

Worried_of_wakefield

Pension contributions should always be worked on as gross contributions. Not net.

tax relief is not a bonus that is added. It is effectively a discount

Sorry dunstonh didn't get this bit, problem I have is she hasn't done her accounts yet, she may exceed the £10k earnings slightly, if she earns say £11000, she can then contribute a further £750 ish and enjoys a further £200 ish tax relief making ( in my simple mind!) a total of £11000 ish which exceeds her pa of £10650, is that right or am I reading this wrong?

Dazed_and_confused

"Earnings" are irrelevant.

It is her taxable profit which matters.

Her (reduced) Personal Allowance is irrelevant as well as far as what she can contribute is concerned.

If she has taxable profits of £11,000 and no other income/pension contribution other than the £10k already referred to then she can contribute another £1,000 (she pays £800 and £200 basic rate tax relief will be added).

Note that in this scenario she will have tax to pay on £340 of the profits (£11,000 - £10660 reduced PA = £340).

Plus Class 2 NI and Class 4 NI as normal.

Her pension contributions have to be declared on her Self Assessment return but as a basic rate taxpayer they will not save her any anything on her personal tax liability.

This all assumes she isn't Scottish resident for tax purposes.

dunstonh

Sorry dunstonh didn't get this bit

You said she has paid in £8,000 this tax year. She hasn't. She has paid in £10,000. Tax relief is a discount on amount paid in. Not a bonus added. So, a £10,000 pension contribution would cost £8,000. But its £10,000 that has gone in.

In post 1 you said that she had £10k of earnings and that a £10k pension contribution had already been made. And you were asking if a further £2,000 could be added (which you probably meant £2,500).

She can only get tax relief on the income earned. So, the £2,500 gross contribution, if made, would not qualify for tax relief and an adjustment would take place as HMRC would want the excess back.

The personal allowance has nothing to do with pension contributions.

So, if she earns £11,000 gross profit then she can make a pension contribution of £11,000 gross. As tax relief is at source (within the pension), she would still have tax to pay to HMRC on the income above the personal allowance.

Worried_of_wakefield

Note that in this scenario she will have tax to pay on £340 of the profits (£11,000 - £10660 reduced PA = £340).

So, if she earns £11,000 gross profit then she can make a pension contribution of £11,000 gross. As tax relief is at source (within the pension), she would still have tax to pay to HMRC on the income above the personal allowance.

This is what I were looking for, clearly couldn't type what was going on in my head!!

thanks everyone