Tax efficient way to deal with PAYE & rental income (&keeping some child benefit too)

stringbeanjane

Hi,
I'm new to the forums and also new to being a landlord. I'm trying to chuck a good amount of money to my pension to a) enjoy the higher rate tax relief (while it lasts...) and b) minimise child benefit I need to pay back.
I'm a higher rate tax payer and contributing about 20% of my gross pay to a workplace DC scheme. My post pension PAYE salary is still a bit above the HRT threshold and also need to pay back a bit of child benefit. 
I also have a small amount of rental income (only £4.2k a year) and I'd rather not pay HRT on it and don't really need the extra cash so majority/all of it can go to pension savings.

Couple of questions:

• I assume I need to open a SIPP to deal with the rental income?
• I'm planning on claiming the £1k annual tax exempt rental income (rather than claiming expenses). So my understanding is that that leaves me with £3.2k of taxable rental income (which would all be taxed at 40% and also result in a bigger payback of child benefit). So let's say I decide I don't want any of the £3.2k in cash and am happy for all of it to go into pension, how would I achieve this in practical terms? I've never contributed to a SIPP before nor done a tax self-assessment return so would appreciate basic newbie friendly guidance on this. 

Thanks in advance!

xylophone

Rental income is taxable income but see
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/tax-relief-members-contributions/
rental income is generally not relevant earnings but some rental income may be included if it is in respect of UK or EEA furnished holiday lettings business
But you have ample "relevant earnings" by way of salary. Increase pension contributions from salary using rent as the income replacement?

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/reduce-high-income-child-benefit-charge/
A SIPP is "relief at source"  (see above) as is a stakeholder.
Which form of tax relief is used by your workplace scheme?
https://www.litrg.org.uk/latest-news/news/181214-do-you-understand-how-tax-relief-your-pension-contributions-works
https://www.gov.uk/child-benefit-tax-charge

stringbeanjane

Thanks xylophone. So as I'm not letting out a holiday home, looks like a better option would be just increasing my workplace pension contributions then and not bother with a SIPP.
My workplace pension is a salary sacrifice scheme. Does that make a difference?

Dazed_and_C0nfused

With salary sacrifice you aren't contributing to a pension.  You are agreeing to a lower salary in return for your employer contributing to a pension.

That is why there is no pension tax relief with salary sacrifice.  The tax benefit arises from having less pay to be taxed in the first place.  And the same with National Insurance.

Salary sacrifice will simply mean your P60 taxable pay figure will be less, presumably leaving more of your basic rate tax band to be used by your other sources of taxable income 

xylophone

With salary sacrifice you aren't contributing to a pension.  You are agreeing to a lower salary in return for your employer contributing to a salary.

Think that's a typo!

xylophone

My workplace pension is a salary sacrifice scheme.

You are able to opt for a higher sacrifice?

Dazed_and_C0nfused

xylophone said:

With salary sacrifice you aren't contributing to a pension.  You are agreeing to a lower salary in return for your employer contributing to a salary.

Think that's a typo!

Thanks, have amended it now 

stringbeanjane

Thanks all. Yep, I'm able to opt to contribute anything between 0 and 100% (and can change that every month so if contributions feel uncomfortably high, I can quickly adjust them down). So I think to keep things simple will just up my contributions, saves me NI as well then as lowers my taxable pay. Anyone think there's a better solution?

Dazed_and_C0nfused

On the pensions board salary sacrifice is usually seen as the best option if it can save you tax and National Insurance.   It's an added bonus if your employer also contributes extra from the NI saving they make by paying you a smaller salary.

It is also simple in other ways as there is no pension tax relief to claim or entries to make on your Self Assessment return as you yourself aren't contributing to the pension.

You do need to remember NMW though so not sure your employer would actually let you sacrifice 100%.

stringbeanjane

Cheers. Definitely not in a position of contributing 100% but will up them to where feel comfortable. Thanks all!