SIPP query

Mrc44

Hi , please could somebody with much more knowledge regarding sipp tax relief help me out and tell me if I’ve got this all wrong regarding how the tax relief works.  I am self employed and a hr tax payer so my understanding is that with a £70k income and I contribute 20k into my sipp my sipp would be worth 25k after the BR tax relief and then I jot in my sipp contributions on my self assessment tax return Come April and my tax code gets altered accordingly? Have I got this correct or am i looking at this all wrong? 

(The 20k figure above is just an example for an easier explanation as there will be other factors such as tax allowance/expenses which will pull my tax down) 
thank you for any clarification 

Dazed_and_C0nfused

The gross contribution of £25k just increases the amount of basic rate tax you can pay.  Which in turn can reduce the amount of higher rate tax you need to pay.

In your example your basic rate band would be increased from £50,000 to £75,000 so you would pay no higher rate tax.  Assuming your only taxable income is £70k of business profit.
Note the basic rate band figures include the Personal Allowance element.

Dazed_and_C0nfused

then I jot in my sipp contributions on my self assessment tax return Come April and my tax code gets altered accordingly? Have I got this correct or am i looking at this all wrong? 

If you are self employed what source of income do you have a tax code for?

Irrespective of that though HMRC never allow tax relief on pension contributions in the tax code of a different tax year to the tax year you make the contribution in.

SonOf

 I am self employed and a hr tax payer
Just checking as we often see people refer to themselves as self employed when they are not and it makes a big difference.
So, are you really self employed or are you a company director with a limited company? (which isnt classed as self employed)

Mrc44

Dazed_and_C0nfused said:

then I jot in my sipp contributions on my self assessment tax return Come April and my tax code gets altered accordingly? Have I got this correct or am i looking at this all wrong? 

If you are self employed what source of income do you have a tax code for?

Irrespective of that though HMRC never allow tax relief on pension contributions in the tax code of a different tax year to the tax year you make the contribution in.

SonOf said:

 I am self employed and a hr tax payer
Just checking as we often see people refer to themselves as self employed when they are not and it makes a big difference.
So, are you really self employed or are you a company director with a limited company? (which isnt classed as self employed)

Hi thank you for your reply’s , I am a sole trader (so fully self employed?) when I am
doing site work I work under a cis scheme where I get taxed at source for 20% then come April when I file my tax return I then have to pay the excess on the hr tax and my class 1/2 NI contributions. So am I right in being self employed or because I also do subcontract type work under a cis scheme I am not actually classed as “self employed” ??  Would it be a wise move to basically contribute the amount above 50k into my sipp to bring me down to the lower BR tax each year? 

Thank you for the help

Dazed_and_C0nfused

Providing you haven't set yourself up as a limited company then yes that is self employment.

But you have referred to class 1/2 National Insurance.  Class 1 is for employees (or company directors) and Class 2 is for the self employed.  Do  you mean class 2 and 4 NIC?

Mrc44

Dazed_and_C0nfused said:

Providing you haven't set yourself up as a limited company then yes that is self employment.

But you have referred to class 1/2 National Insurance.  Class 1 is for employees (or company directors) and Class 2 is for the self employed.  Do  you mean class 2 and 4 NIC?

Thank you dazed and confused, no I haven’t set myself up as a limited company “yet” although I was advised to saying I would be better off something about paying 19% corporation tax but claiming it back at 20% ?? There’s plenty I need to look at and read in to before I even can consider thinking about that as I know nothing on how it works or would be a benefit to me going limited. 

Yes sorry I meant class 2 and 4 NI contributions. 

Dazed_and_C0nfused

The pension contribution is very tax efficient in your situation as not only would you get the initial uplift in your pension fund but your Self Assessment tax bill would be less as you would pay more 20% tax and less 40%.

You might want to think about exactly how much you want to contribute.  If your taxable profit is £70k them you would normally be paying 40% tax on £20k of the £70k.

So £25k gross (£20k paid by you) would probably save you £4k in personal tax.

But £20k gross (£16k paid by you) would also probably save you £4k in personal tax.

It's a toss up between maxing the personal tax benefit and getting the money in your pension asap so it can be invested and has longer time to grow for your retirement.

Mrc44

Dazed_and_C0nfused said:

The pension contribution is very tax efficient in your situation as not only would you get the initial uplift in your pension fund but your Self Assessment tax bill would be less as you would pay more 20% tax and less 40%.

You might want to think about exactly how much you want to contribute.  If your taxable profit is £70k them you would normally be paying 40% tax on £20k of the £70k.

So £25k gross (£20k paid by you) would probably save you £4k in personal tax.

But £20k gross (£16k paid by you) would also probably save you £4k in personal tax.

Ahh so is the tax relief on the overall gross amount once the 25% contributions have been added and not just on the amount I’ve added. Ie I put 16k in and it equates to me paying BR tax on an extra 20k per annum so 70k in the BR rate? Which is the same result in me putting 20k in pushed up to 25k after contributions in regards to paying BR tax other than I would just have an extra 5k into my pension pot giving it more time
to grow? 

Also in regards to it being almost the end of the 2019/20 tax year how does it work with changing my tax code so late or would they just do a calculation over the year and then take it off my tax bill / reimburse me or add more to my pension pot? 

Thank you kindly for sharing your knowledge regarding pensions / tax workings on here, you really seem to be clued up with it and know your stuff and it’s a great help. Appreciate it 

Dazed_and_C0nfused

Also in regards to it being almost the end of the 2019/20 tax year how does it work with changing my tax code so late or would they just do a calculation over the year and then take it off my tax bill / reimburse me or add more to my pension pot? 

If you are self employed where does a tax code come into things?

Or is there some other taxable income you haven't previously mentioned on top of the £70k profit?

You include details of the gross contribution on your Self Assessment tax return and your Self Assessment calculation takes into account the increased basic rate threshold.  

Any personal tax saving benefits you through a smaller tax bill or larger refund, it doesn't get added to your pension fund.

Mrc44

No other taxable income , I always just assumed Everyone got a tax code for some reason
That’s cleared that up for me and I shall definitely be making the most of the pension contributions for the tax efficiency benefit. 

Thank you for your help dazed and confused , appreciate it