Invest in SIPP short term purely for tax relief

DBdoobydoo

Dazed_and_C0nfused said:

Before the end of this tax year I will pay into the SIPP £16K which will be made up to £20K with standard rate tax relief then I will contact HMRC regarding the other £4K & either get that as a refund or they will adjust my tax code for next tax year.

No.  You will either get a new tax code for the current tax year (but time is running out for that) or a tax calculation for 2019:20 to increase your basic rate band by £20k.  The result of which will pay 20% on an additional £20k instead of 40% tax.  So if you have paid sufficient 40% tax the tax benefit is £4k (£20,000 x 20%) but any other adjustment due to finalise that tax year will be taken into account within the calculation so it is unlikely you will get exactly £4,000 refund.

As far as the overall benefit is concerned then I wouldn't quite describe it how you have but the end outcome is the same.

Across two years you will contribute £32k.

The basic rate tax relief will uplift that to £40k.

TFLS would be £10k.

Taxable element would be £30k so at current tax rates £6k tax would be paid leaving £24k net pension income.

At that point you have contributed £32k and received £34k back.

If you have paid sufficient 40% tax in each tax year for the contribution to save you £4k each year then your personal tax liability will be £8k less than it would normally be.

So overall cost to you is £24k with return of £34k.

Thanks for confirming my calculations.

My total income is around £77K. The value of my DB pension to be offset against my annual allowance is just under £18K (16 x difference in benefit accumulated over 1 year) so in theory I could contribute up to £32K including tax or £24K net but as I only pay higher rate tax on about £27K it wouldn't be so worthwhile.

As my £16K pension contribution pretty much maximises use of higher rate tax relief for every £800 that I contribute above I would get only standard tax relief bringing it up to £1000 but I can immediately take £250 of that as a TFLS leaving £750. So if I could manage £20K instead of £16K my figures become:-

Pay in £20K which gets uplifted to £24K with standard tax relief. Take out £6K as a TFLS leaving £18K but then get a further £4K in higher rate tax relief. Leaving me £18K in my SIPP that will have cost me just £10K (£18K-(£4K tax refund & £6K TFLS)). Do this 2 years running & I have £36K in my SIPP at a cost of £20K.

Dazed_and_C0nfused

Pay in £20K which gets uplifted to £24K 

It would be uplifted to £25k, not £24k.

Everything after would depend on whether you you want to contribute £20k net (which is £25k gross) or £24k gross (which is £19.2k net).

Albermarle

As said you will probably end up with a refund for this year. HMRC will then automatically adjust your tax code for next tax year on the assumption you will continue to make these level of contributions , so there will be no one off refund next year, but you will pay less tax during the year. One point to watch is that they will assume that the situation will remain the same in following tax years, and not adjust your tax code back until you request it , so if you are not careful you might not  pay enough tax in a future tax year and end up having to pay them back . So as soon as you stop the contributions, and/or stop being a HR taxpayer you need to inform them .