100% income in SIPP and VCTs

Xavier.z

Hi,

I'm 54 and was made redundant in October 2018. My P45 shows income £90k and tax £30k. I have a workplace pension of £700k which was paid into via salary sacrifice.

I had sufficient pension allowance carryforward to commit a payment of £71k into a SIPP and receive £17k relief at source to give a total SIPP value of £89k. I intend to draw this down over 2-3 years and allow £700k to grow before I consider touching it.

Based on the basic rate band extension of £89k I will be due around £15k tax repayment this year. This leaves a further £15k liability per self assessment.

I've spent a couple of days scouring the internet and various forums looking for a definitive answer to the following:

1. Can I make a £40k VCT new share purchase and receive the £12k tax credit against the £15k remaining liability or is £15k paper only as it's been returned at source via the SIPP.

I understand the risks with VCTs and £40k net £28k will be around 10-15% of investments over next years.

Any support appreciated and any additional references also greatly appreciated.

Regards

Dazed_and_confused

You've confused me!

You have paid £30k tax

You are intending to pay £89k into a SIPP (with relief at source). This will increase your basic rate band by £89k although a lot of this is irrelevant as your total income is only £89k (assuming you haven't neglected to mention some other income)

You estimate that £15k of the £30k will be overpaid as a result.

So you still have £15k PAYE tax paid

What relevance does the £17-18k relief at source have to this?

Xavier.z

Hi Dazed & Confused,

Apologies for spreading my confusion :-) there are no other sources of income. Extension of basic rate affords me the additional higher rate relief I don't receive at source, I only mention for this reason.

If the pension payments had been made via salary sacrifice instead of SIPP at source then my liability would be zero and there would be nothing to credit the VCT against. It's only an artefact of relief at source that gives rise to my confusion:

PAYE tax paid £30k

Relief at source £17k + repayment £15k + vct credit £12k = £44k

To put the question another way - if you receive relief at source does the revenue look to ensure sufficient tax paid to approximately cover after any tax credits applied.

Apologies if this simply confuses further ;-) but at least explains my ignorance and reason for posting and hoping for clarification.

Dazed_and_confused

To put the question another way - if you receive relief at source does the revenue look to ensure sufficient tax paid to approximately cover after any tax credits applied

No. Providing you meet the relevant rules to be able to make a qualifying contribution of £89k then you do not need to consider the tax you have actually paid.

There are numerous threads on here from non taxpayers who pay £2,880 a year into a relief at source pension scheme and receive the 25% uplift from HMRC giving them a fund of £3,600.

bowlhead99

Xavier.z wrote: »

Hi,

I'm 54 and was made redundant in October 2018. My P45 shows income £90k and tax £30k.

You have *paid* £30k tax so far, but the tax *actually due* on £90k of earnings for 2018/19 is not as much as £30k - unless there's something you're not telling us.

Ordinarily on £90k of earnings you would pay
£0 on your personal allowance of £11850 at 0%
£6900 on your basic rate band of £34500 at 20%
£17460 on the last £43650 at 40%

So that would be a total of £24360. The reason you've paid £30k is perhaps because for PAYE purposes your personal allowance was spread over the entire year and allowed on your payslips one month at a time - so across your payslips haven't had the benefit of the whole personal allowance because you were only earning for the first 6 months of the year, and not getting any payslips (so not getting any personal allowance) over the last 6 months. And depending on your basic salary there might have been an assumption that your total salary would be £100k+, reducing the total personal allowance they put into your tax code anyway.

So if you didn't earn anything else for 2018/19 since you stopped work, your total tax bill would shake out to £24k for the tax year; and because you paid £30k as you were going along through PAYE, they have too much of your cash and you'll get £6k back.

Then they would look at the effect of you making a big pension contribution. You get relief at source for 20%, but that's not sufficient to compensate you for the fact that on the last £17460 you were paying 40%. To sort you out for that, they will extend the size of the basic rate band so on that last £17460 you will only pay 20% instead of 40%. That saving is worth £17460/2 or £8730.

Fortunately they do not look at it the other way around and say that in your £11850 personal allowance band you only paid 0% yet took 20% pension relief at source and owe them some money the other direction. It's fine to take pension relief at 20% even as a non-taxpayer (my retired mother does it) as long as you keep to the contribution limits.

So if previously your correct tax bill without SIPP contributions was 24360, your revised tax bill will be only 15630 after you get back the £8730 that higher rate tax back. The refund of about £6k that you were going to get if you had no SIPP contribution, will increase to more like £15k depending on roundings.

Based on the basic rate band extension of £89k I will be due around £15k tax repayment this year. This leaves a further £15k liability per self assessment.

So, you are going to get some money back because £30k paid during the course of the year through PAYE is much higher than the actual tax bill of £15630.

But since there is an actual income tax bill of £15630 for the tax year, it seems you have the opportunity to reduce that through other income tax reliefs like VCT, EIS and so on.

However, as advice from anonymous strangers on the internet carries no warranties and might be given in good faith by someone who has never been in your situation and misunderstands the rules, or might be given in bad faith by a troublemaker, you could always pay a tax professional a reasonably small amount of money to write you a letter confirming how the rules apply to you, if you are not crystal clear from reading the law and regulations yourself.

Xavier.z

Hi Dazed & Confused / bowlhead99,


Many thanks for the clarifications much appreciated. bowlhead99 - you were spot on re the reasons for the repayment - yes this will be due to PAYE imbalance as I only worked for 6 months and the higher rate relief due.



Appreciate warning regarding forum advice - I've read through the HMRC VCT handbook and can't find any reference to restricting credit allowed due to relief at source, just wanted to confirm I wasn't missing something regarding interaction of VCT and SIPP.



Regards & thanks again to you both.