SIPP contributions to avoid losing personal allowance

chucknorris

I also posted this in the cutting tax board, but I think here might be better:

This current tax year I may end up paying an effective higher rate of tax than 40%, due to possibly losing part of my personal allowance, because my income will be more than £100k. It all depends how the tax calculation works, and I am hoping someone on here knows how it is applied, to explain:

I would like to use pension contributions to reduce my taxable earnings, but after looking at the inland revenue's tax calculation for me last year, it is laid out like this:

All income is totalled to give a 'total income received figure' (£97119), it then minuses my personal allowance (£11,500) which gives a 'total income on which tax is due' (£85,619).

But the lump sum contributions that I invested into my SIPP only get considered after this stage (by increasing the 20% tax band).

So my question is (sorry it took some time to get to it), this year when my 'total income received figure' goes over £100k, will my 'minus personal allowance' figure be reduced because my total income is over £100k. If so, it means that paying into my SIPP is not going to prevent my personal allowance from being reduced.

Or am I misunderstanding how the reduction in personal allowance is applied?

chucknorris

I think I may have found the answer here:

https://www.gov.uk/guidance/adjusted-net-income#what-is-adjusted-net-income

It states that gross pension contributions are taken into account to calculate 'adjusted net income' , but I am wondering why my previous tax calculations by the inland Revenue have never referred to this?

Is it simply because they only would refer to this when someone's 'total income received' is over £100k?

chucknorris

Actually my has wife just pointed out that my income was over £100k before I dropped down to working one day per week, after checking those tax returns, I can see that I did not lose any personal allowance (due to pension contributions).

MoneyGeoff

Payments into a SIPP to reduce your taxable income below £100K do prevent the reduction of your personal allowance, I've done that in previous years. The way they present the calculation is a bit confusing though.

Dazed_and_confused

The key thing here is that payments into a relief at source SIPP do not reduce your taxable income.

They do however reduce your adjusted net income, which is what Personal Allowance, Married Couple's Allowance and the High Income Child Benefit Charge are all based on.

They also increase the amount of basic rate tax payable, which in turn can reduce the amount of higher rate tax payable.

But if you have taxable income of say £105,000 and contribute £5,000 (gross amount including basic rate tax relief) into a SIPP then you will still be taxed on £105,000. But an additional £5,000 will be taxed at 20% instead of 40%.