Basic SIPP question-calculating tax relief and investment types

C_Mababejive

If i am a basic rate taxpayer, how do i calculate how much tax relief i will be credited with when paying into a SIPP?

Also leaving aside diversification/risk/choice etc,,are there any advantages/disadvantages to holding shares in a sipp rather than collective investments..? or is it simply that they are just another investment which hopefully generates growth?

I'm just thinking that shares held in an ISA pay no tax. If youve maxed out your isa well you could retain basic rate taxpayer status and pay 7 % on divis but if they are in a SIPP the final output tax might be 20%...

Thanks

Dazed_and_confused

If i am a basic rate taxpayer, how do i calculate how much tax relief i will be credited with when paying into a SIPP?

Contributions eligible for tax relief will receive 20% tax relief.

20% relates to the gross investment, with the tax relief added, so it is actually 25% of the actual contribution which is added to the pension fund.

For example you contribute £80.

The pension company, courtesy of HMRC, adds £20.

Your pension fund has £100.

bluenose1

Yes for every £80 you contribute this gets topped up to £100 in your pension fund.
You can withdraw 25% of your pension pot tax free so if you are a basic rate tax payer you can take out £85 after tax. A 6.25% return on your original £80.

C_Mababejive

bluenose1 wrote: »

Yes for every £80 you contribute this gets topped up to £100 in your pension fund.
You can withdraw 25% of your pension pot tax free so if you are a basic rate tax payer you can take out £85 after tax. A 6.25% return on your original £80.

I hadnt thought of it that way,,,and thats before investment gains also....

Thrugelmir

A SIPP is just a wrapper. How you decide to invest your money is entirely up to you. Unless you've the inclination to spend time undertaking research, collective investments may be a better option than single company shares.

AnotherJoe

C_Mababejive wrote: »

I'm just thinking that shares held in an ISA pay no tax. If youve maxed out your isa well you could retain basic rate taxpayer status and pay 7 % on divis but if they are in a SIPP the final output tax might be 20%...

Thanks

You've forgotten the 25% bump the investment got when it went into the SIPP, which is effectively a 25% bump on future dividends because you will be getting 25% more dividends than you otherwise would were the shares in an ISA say. So the benefits are the same as anything else that pays dividends, no tax on the way in, tax on the way out. Still comes to a net gain.

nigelbb

bluenose1 wrote: »

Yes for every £80 you contribute this gets topped up to £100 in your pension fund.
You can withdraw 25% of your pension pot tax free so if you are a basic rate tax payer you can take out £85 after tax. A 6.25% return on your original £80.

Even better if you are currently a higher rate tax payer but intend to take a pension that is only subject to basic rate income tax as for every £60 you pay in you get £85 back or a return of 41.67%.

C_Mababejive

Just another question,,When filling in HMRC SA form ,the section on contributions to pensions eg a SIPP ,what figure do i put in that box? is it the money i paid in plus the tax relief received on it a few months later ?

Thanks

Dazed_and_confused

The notes to help you complete your return state,

Personal contributions that had tax relief in the scheme

Box 1 Payments to registered pension schemes operating ‘relief at source’

Under the ‘relief at source’ system, your pension provider claims basic rate tax relief (of 20%) on your personal contributions and adds that to your pension pot.

Put the total amount in box 1 – that is, your personal contributions paid to the scheme, plus the basic rate tax relief. Include any one-off contributions you made in the year and provide the details of any one-off contributions in ‘Any other information’ on page TR 7.
Use the pension certificate or receipt you get from the administrator to fill in box 1 or work out the figure by dividing the amount you actually paid by 80 and multiplying the result by 100.

Example
Emma paid £700 into her pension scheme. She puts £875 in box 1 (£700 divided by 80 and multiplied by 100), which is her net payment plus the tax relief of £175 (£875 at 20%).

If you pay tax at a rate above 20% you should still fill in box 1 with the amount you paid in plus the basic rate (20%) tax relief. We’ll work out the extra tax relief due to you over the basic rate claimed by your pension provider.

C_Mababejive

Ah yes, thanks D&C, its all coming back to me, i think i asked the same question last year...