How and when does tax relief work on SIPP contributions?

bobfredbob

As a Basic Rate tax payer, how does basic rate tax relief work on a SIPP invested in stocks?
Say I opened a SIPP and invest £1000, does that immediately get grossed up by the pension provider by 20%?
Or do I only get a credit after a few days delay or after I file my self assessment or after the 5th April?
Does it work differently if I become a higher rate tax payer?

Also, if I know I’m going to earn X by the end of the tax year, can I contribute now to the pension and get tax relief, or do I have to wait until I’ve actually earned that amount in PAYE before adding to the pension pot to get tax relief?

So, say I want to contribute £5000 (so above the £2,880 net automatically allowed limit), can I contribute £5000*0.8 now, or do I have to wait until I PAYE £5000?

If it makes a difference, I’ve not contributed to my personal pension for the past few years (been paying in to ISA to have a buffer), so even if it’s a new SIPP I believe new contributions count as being from the past three years of my unit linked personal pension, but also curious for future years.

Thanks.

Tealblue

Some providers gross up immediately, others later in the year. You'd need to check with the provider you have in mind. Basic rate happens automatically, not related to your tax return. If you become a higher rate taxpayer, you can claim relief on contributions provided you paid higher rate on these in the first place (e.g. if your pay higher rate tax on £20 of your income and make a contribution of £50 to your SIPP, only £20 of it qualifies for higher rate relief). You can claim via your tax return or by contacting HRMC.

You can contribute now but be aware there are significant issues if you then don't earn enough to 'cover' these. 

You can only use carry forward if you make the maximum contribution (£40K including tax relief) in the current tax year. More info: https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/carry-forward

dunstonh

Say I opened a SIPP and invest £1000, does that immediately get grossed up by the pension provider by 20%?

Is that £1000 gross or £1000 net you are opening it with?

A £1000 contribution gets 20% relief.   So, £1000 is what goes into the pension but its cost you £800 as the provider claims the £200 relief from HMRC.

It is not a bonus that is added.   However, it is quite possible to word it as a bonus even though it isn't.  i.e. £800 contribution gets a 25% bonus to make it £1000.  That is the wrong way to word it technically but many consumer sites do it that way for simplicity and the outcome is the same if you are non-rate or basic rate taxpayer.  It doesnt work if you are a higher rate taxpayer though.  It also risks making mistakes if you are near the annual allowance.

So, you are often best to refer to it in the same way it actually happens and how HMRC view it. i.e. a relief. not a bonus.

So, say I want to contribute £5000 (so above the £2,880 net automatically allowed limit), can I contribute £5000*0.8 now, or do I have to wait until I PAYE £5000?

So, you have an annual salary of a least £5000 for that.  A £5000 contribution will cost you £4000.  The pension provider will claim the relief of £1,000 from HMRC and add it to your pension.   

When you pay it during the year does not matter.    The tax year is viewed as a whole.  So, you could make the pension contribution on the 6th April even if your earnings dont pass the £5000 mark until say September.  It is the total at tax year end that matters.

so even if it’s a new SIPP I believe new contributions count as being from the past three years of my unit linked personal pension, but also curious for future years.

Carry forward is only available if you are earning over £40,000 a year or you are a company director or hold an officer's position within a company.  So, you couldnt make a £5,000 contribution using carry forward unless you have already made a £40,000 contribution in this tax year.

Albermarle

Say I opened a SIPP and invest £1000, does that immediately get grossed up by the pension provider by 20%?

With the low cost retail SIPP providers ( HL, Fidelity, A J Bell, Interactive Investor etc ) you have to wait around 6 to 8 weeks for the tax relief is credited to your account . If you have a more traditional personal pension with the likes of Standard Life, Scottish Widows, Aviva etc they 'pre fund' the relief and credit your account immediately.

If you add £1000, the basic rate relief is £250 .

[Deleted User]

Real life examples from HL and II and AJ Bell

Tax Year	Provider	Paid Date	Tax Credited
19-20	interactive investor	26/02/2020	22/04/2020	YES
19-20	Hargreaves Lansdown	01/04/2020	21/05/2020	YES
20-21	Hargreaves Lansdown	06/04/2020	22/06/2020
20-21	Hargreaves Lansdown	15/04/2020	22/06/2020
20-21	AJ Bell	20/04/2020	25/06/2020
20-21	Hargreaves Lansdown	28/04/2020	22/06/2020
20-21	AJ Bell	30/04/2020	25/06/2020
20-21	Hargreaves Lansdown	07/05/2020	21/07/2020

bobfredbob

Thanks everyone for the explanations and concrete examples, and also explaining the carry forward: I'd missed the bit about having to contribute £40,000 to be able to carry forward.

Albermarle

bobfredbob said:

Thanks everyone for the explanations and concrete examples, and also explaining the carry forward: I'd missed the bit about having to contribute £40,000 to be able to carry forward.

The carry forward rules are a source of confusion for many people.
The point to keep in mind is that you can not receive/gain more tax relief in one tax year than you have actually paid in tax that year . Regardless of previous years .

Dazed_and_C0nfused

Albermarle said:

bobfredbob said:

Thanks everyone for the explanations and concrete examples, and also explaining the carry forward: I'd missed the bit about having to contribute £40,000 to be able to carry forward.

The carry forward rules are a source of confusion for many people.
The point to keep in mind is that you can not receive/gain more tax relief in one tax year than you have actually paid in tax that year . Regardless of previous years .

I think a lot of those paying £2,880 each year would disagree 

dunstonh

Albermarle said:

Say I opened a SIPP and invest £1000, does that immediately get grossed up by the pension provider by 20%?

With the low cost retail SIPP providers ( HL, Fidelity, A J Bell, Interactive Investor etc ) you have to wait around 6 to 8 weeks for the tax relief is credited to your account . If you have a more traditional personal pension with the likes of Standard Life, Scottish Widows, Aviva etc they 'pre fund' the relief and credit your account immediately.

If you add £1000, the basic rate relief is £250 .

 Both Aviva platform and Standard Life platform have lower charges than HL on funds.   Both of them pre-fund tax relief and switches on their modern platforms. One of them prefunds tax-free cash and uses CHAPS to get it into the account within 24 hours.

Cost is not really an indication of whether pre-funding is used or not.   It seems to be more likely on providers that predominantly retail via advisers rather than providers that retail direct to consumer. i.e. you rarely see it on providers that only have a direct to consumer model.

tigerspill

The refund of tax seems to be dependent on the provider.
With Standard life, I received the tax within a day or two.  With HL, we had to wait until the 21st in the second month out (they publish a table).

dunstonh

tigerspill said:

The refund of tax seems to be dependent on the provider.
With Standard life, I received the tax within a day or two.  With HL, we had to wait until the 21st in the second month out (they publish a table).

That is where prefunding comes in.   Standard Life prefund tax relief.  So, you get it immediatly     HL do not prefund so you have to wait until they get before they apply it to your pension.