Taking SIPP payment in final year of working

tigerspill

Hi,
Maybe my understanding is wrong, but am wondering if I can do the following.
If I have been paying into a SIPP for a few years, and plan to retire in the tax year in which I turn 55.
If during that final year, I put 100% of my earnings into the SIPP - I think this in effect means I have zero taxable earnings in that tax year.
If this is correct - then in that same tax year, can I draw the 25% tax free lump sum along with the £12,500 at zero rated tax from the SIPP all tax free?

Thanks.

Dazed_and_C0nfused

SIPP contributions have no impact whatsoever on your taxable income.

They just increase the amount of basic rate tax you can pay.

cloud_dog

tigerspill said:

Hi,
Maybe my understanding is wrong, but am wondering if I can do the following.
If I have been paying into a SIPP for a few years, and plan to retire in the tax year in which I turn 55.
If during that final year, I put 100% of my earnings into the SIPP - I think this in effect means I have zero taxable earnings in that tax year.
If this is correct - then in that same tax year, can I draw the 25% tax free lump sum along with the £12,500 at zero rated tax from the SIPP all tax free?

Thanks.

No.

The end result may work out that way but.... At the point of taking your first SIPP payment/withdrawal the provider will not know your tax code and is likely to tax your payment.  HMRC will not have recieved all the information for your earnings for the FY and therefore will not consolidate the earnings/withdrawals.

Hopefully, HMRC might give you a refund based on low/no earnings and taxation on your withdrawal but it will all be after the fact.

SonOf

If this is correct - then in that same tax year, can I draw the 25% tax free lump sum along with the £12,500 at zero rated tax from the SIPP all tax free?
You can but it may not be the best way of doing things as you may have a short term tax gain in that year but over the remainder of your life, you will have increased your taxation.     You would need to model when the breakeven point is based on reasonable assumptions.

Dazed_and_C0nfused

cloud_dog said:

tigerspill said:

Hi,
Maybe my understanding is wrong, but am wondering if I can do the following.
If I have been paying into a SIPP for a few years, and plan to retire in the tax year in which I turn 55.
If during that final year, I put 100% of my earnings into the SIPP - I think this in effect means I have zero taxable earnings in that tax year.
If this is correct - then in that same tax year, can I draw the 25% tax free lump sum along with the £12,500 at zero rated tax from the SIPP all tax free?

Thanks.

No.

The end result may work out that way but.... At the point of taking your first SIPP payment/withdrawal the provider will not know your tax code and is likely to tax your payment.  HMRC will not have recieved all the information for your earnings for the FY and therefore will not consolidate the earnings/withdrawals.

Hopefully, HMRC might give you a refund based on low/no earnings and taxation on your withdrawal but it will all be after the fact.

They wouldn't do that because of any SIPP contribution though.

If you earn say £12,000 and contribute £12,000 (gross) to a SIPP your taxable income is still £12,000 and you would just £500 of your Personal Allowance left unused.

Your basic rate tax band would however be £49,500 rather than £37,500.

Dazed_and_C0nfused

SonOf said:

If this is correct - then in that same tax year, can I draw the 25% tax free lump sum along with the £12,500 at zero rated tax from the SIPP all tax free?
You can but it may not be the best way of doing things as you may have a short term tax gain in that year but over the remainder of your life, you will have increased your taxation.     You would need to model when the breakeven point is based on reasonable assumptions.

Given the rest of the original post on what basis would the £12,500 taxable income taken from the SIPP in the same tax year be tax free?

cloud_dog

This is true but it depends on the tax code used in the employment earnings/contributions role and the tax code utilised by the SIPP provider, and any implication of standard PAYE calculations based on the tax code and when the payment is made in the FY, no?

Dazed_and_C0nfused

cloud_dog said:

This is true but it depends on the tax code used in the employment earnings/contributions role and the tax code utilised by the SIPP provider, and any implication of standard PAYE calculations based on the tax code and when the payment is made in the FY, no?

I think everyone is at cross purposes on this thread.

The op originally asked 

If during that final year, I put 100% of my earnings into the SIPP - I think this in effect means I have zero taxable earnings in that tax year.

I don't think this has any impact on the amount of their taxable earnings.  If they earn say £12k and contribute £12k (gross) to a SIPP they still have taxable earnings of £12k.

Different types of pension contributions work in different ways and relief at source ones to a SIPP are totally different to "net pay" or salary sacrifice which would reduce taxable income.

cloud_dog

Agreed.

The main thrust of my post was in relation to the OPs question / statement and clarifying the practical aspect of this:
If this is correct - then in that same tax year, can I draw the 25% tax free lump sum along with the £12,500 at zero rated tax from the SIPP all tax free?

Dazed_and_C0nfused

Ok.  I had picked up on this comment,

Hopefully, HMRC might give you a refund based on low/no earnings and taxation on your withdrawal but it will all be after the fact.

As I see it the SIPP will have no impact on the op's taxable earnings so they are unlikely to have low/no earnings.

But it would be helpful if the op could clarify what they expect their taxable wage/salary will be in the tax year they retire.

tigerspill

Dazed_and_C0nfused said:

cloud_dog said:

This is true but it depends on the tax code used in the employment earnings/contributions role and the tax code utilised by the SIPP provider, and any implication of standard PAYE calculations based on the tax code and when the payment is made in the FY, no?

I think everyone is at cross purposes on this thread.

The op originally asked 

If during that final year, I put 100% of my earnings into the SIPP - I think this in effect means I have zero taxable earnings in that tax year.

I don't think this has any impact on the amount of their taxable earnings.  If they earn say £12k and contribute £12k (gross) to a SIPP they still have taxable earnings of £12k.

Different types of pension contributions work in different ways and relief at source ones to a SIPP are totally different to "net pay" or salary sacrifice which would reduce taxable income.

I think your final paragraph highlights my lack of understanding.
I am used to pension contributions through employee salary sacrifice where your earnings are reduced and this is reflected on P45/60 documentation.  So if I earned £12,500 (gross) in a tax year, and paid all that into my pension via salary sacrifice (ignoring minimum wage constraints), then my P60 would show zero income and zero tax.  Therefore I would still have the full £12,500 tax free allowance to use against taking payment from a pension (on top of the 25% TFLS).
What I was wondering is can something similar me made work with a SIPP rather than an employee pension.

So on my self assessment, I would put employee earnings of £12,500 and tax paid as zero.  And complete the contribute to pension section with £12,500 (where tex relief at BRT is applied by SIPP provider).  I am trying to understand how this impacts the tax bands to understand if it increases the zero rate tax band (like it does with HRT band).
Maybe I need to wait until April and play around with my SA form when it becomes available.