SIPP cash account credit adjustment

BrockStoker

Albermarle said:

It's a bit worrying that you opened an investment/SIPP whilst not understanding the most basic thing about pensions. Tax relief.
Extract from the I web SIPP front page >
*You will automatically receive 20% in basic rate relief paid to your SIPP. If you are a higher/additional rate tax payer you can then claim an additional 20% or 25% (depending on your tax rate) via your tax return.
This time you have come out OK but with this lack of knowledge you might make a major error at some point . Suggest you have a good look through this link:
https://www.pensionsadvisoryservice.org.uk/about-pensions

I'm more concerned with the underlying investments rather than the wrapper itself. I knew it was not a bad thing, and needed to get my money into a tax wrapper fast, or risk having large amounts of cash sitting there not doing anything. It was SIPP or nothing. I chose SIPP, but only after asking on here, and since I see many of the regular posters on here as trustworthy (have been reading/posting on here for around 7 years now, if not more), I didn't see the need to read all the small print.

But thank you all the same. I will have a read through the link you kindly provided.

Albermarle

'm more concerned with the underlying investments rather than the wrapper itself.

Interestingly the large majority of posters asking questions about pensions, ask about tax relief, drawdown, which provider to choose etc They are often unaware what actual investments they hold within the pension . So the other way around from you !

MinuteNoodles

2unlimited91 said:

Did you earn (from employment and/or self-employment) at least £25k before tax in 2019-2020? Because if not, you have claimed too much tax relief. 

Doesn't work like that. Even if you're a non-taxpayer you can still get relief added on up to £2880 of contributions to your SIPP. 

2unlimited91

MinuteNoodles said:

2unlimited91 said:

Did you earn (from employment and/or self-employment) at least £25k before tax in 2019-2020? Because if not, you have claimed too much tax relief. 

Doesn't work like that. Even if you're a non-taxpayer you can still get relief added on up to £2880 of contributions to your SIPP. 

Read what I said again. It was a (correct) statement about the earnings requirements for being able to reclaim tax relief on pension contributions of £25k. Not a general statement about the the requirements for claiming relief on contributions of £x, for any value of x.

To be a bit more helpful: for contributions between £3,600 and £40,000, the earnings requirement is to have earnings at least as large as those contributions. For contributions outside that range, it is different.

BrockStoker

It was money from an inheritance, and I had to pay significant tax to HMRC as the total estate was over £1M. Glad to get some tax relief at last!

bowlhead99

BrockStoker said:

It was money from an inheritance, and I had to pay significant tax to HMRC as the total estate was over £1M. Glad to get some tax relief at last!

For the tax relief, the specific source of the money that you put into the pension is irrelevant - you might have got it as a gift, or earned it, or earned it ten years ago, or borrowed it, or inherited it, or found it down the back of the sofa.

The key thing that matters is whether you will have enough earnings in the tax year in which the contribution is made to support having the basic rate of income tax on those earnings relieved by putting it in a pension. If you have at least £25k+ of earnings from employment, or business profits from self-employment, for the tax year in which you make the contribution, you can have £25k gross go into a pension (i.e. you put £20k in and the provider claims basic rate relief so you get £25k in the pension for the net £20k contribution).

If you'll have less than £25k of relevant earnings (earnings from employment or business profits from self-employment) for the tax year in which the SIPP company gets your contribution, then you can't have as much as £5k tax relief on your pension contributions and you must tell your pension company that a mistake has been made.  The fact that significant inheritance taxes were paid in relation to an inheritance is neither here nor there in relation to how much tax relief is allowed to be taken on pension contribution - because the type of tax being relieved on a pension contribution claim is income tax not inheritance tax.

I presume that if IWeb received and added the pension relief in late May they claimed it during April based on the contributions you made pre- 6 April, i.e. the £20k put into the SIPP was a 2019/20 tax year contribution.  If that's the case, and you made £25k or more of self-employed profits for 2019/20 you'll be fine, and you'll just mention the £25k on your tax return in the appropriate box.

If when you mention you're 'employing yourself', you mean you are doing that through a limited company, then the SIPP company won't be allowed to have claimed any relief at all, as the money from the company would just go in gross (reducing its corporation tax bill and avoiding you having to pay income tax on it if it had been given to you as salary).

BrockStoker

If you'll have less than £25k of relevant earnings (earnings from employment or business profits from self-employment) for the tax year in which the SIPP company gets your contribution, then you can't have as much as £5k tax relief on your pension contributions and you must tell your pension company that a mistake has been made.  The fact that significant inheritance taxes were paid in relation to an inheritance is neither here nor there in relation to how much tax relief is allowed to be taken on pension contribution - because the type of tax being relieved on a pension contribution claim is income tax not inheritance tax.

Thank you for clarifying bowlhead. I did not have any earnings from self-employment, so I will sell some stock (I already bought some stock of "new" company which I had my eye on using some of the 5K), and notify IWeb once I have sufficient funds - I've already sold some stock and booked another sale. On the plus side, it gave me the chance to make some changes to the portfolio.

bowlhead99

BrockStoker said:
 needed to get my money into a tax wrapper fast, or risk having large amounts of cash sitting there not doing anything. It was SIPP or nothing. I chose SIPP, but only after asking on here, and since I see many of the regular posters on here as trustworthy (have been reading/posting on here for around 7 years now, if not more), I didn't see the need to read all the small print. 

It doesn't seem to me that it was SIPP or nothing. It was invest inside a SIPP or invest outside a SIPP. Investing outside a SIPP doesn't mean you keep all your money as 'cash sitting there not doing anything', it just means your investments are not in a SIPP. 

Putting large amounts of cash into a SIPP when you're not getting tax relief on it may well be counterproductive, especially as you say you want to 'max out' your SIPP before you buy your property. When you eventually draw all the money out of the pension it will be taxable as income (other than the quarter of it that can be taken as a tax free lump sum). For most people, using a pension gives their investment gains a boost, because they are investing income that is grossed up for tax relief on the way in, and taxed at a lower rate on the way out - it's a net win.  However if you're investing money that hasn't been grossed up, and then you pay tax on getting it out  at your marginal tax rates (not just on the amount that represents gain, but on the amount that represents your original contribution coming back to you) then that's a net loss. 

If you invest outside a tax wrapper and are only a basic rate or nil rate taxpayer, the dividend income will not be taxable at more than 7.5%, after you've used up your annual personal allowance and dividend allowance. And the net capital gains will only be taxable at 10%, with an annual exemption available for the first ~£12k of gains in each tax year.

Whereas if you invest inside a pension, the income and gains are rolled up until you draw it out, but  when you do draw it out - apart from the quarter of it that isn't taxable - it will all be taxable income and you'll pay tax at your marginal income tax rate (which might be 20% to 45% depending on how much you are taking in a particular tax year) and you are paying it on not just the profits from all those years of investing, but your original cost as well!

Albermarle

It was money from an inheritance, and I had to pay significant tax to HMRC as the total estate was over £1M.

You seem pretty confused about tax in general .

An inheritance you receive is not taxable . The estate it came from may have had to pay inheritance tax which would reduce its size, but you personally as the receiver of inherited money have no tax liability on it.

 needed to get my money into a tax wrapper fast,

As Bowlhead has explained in detail , investing in a SIPP when you have insufficient/no taxable income was a big mistake .So you have in fact invested in a tax wrapper that gives a negative tax result

What's done is done but future investments should be outside a SIPP, until you have sufficient earnings to benefit from the tax relief.

AnotherJoe

Albermarle said:

It was money from an inheritance, and I had to pay significant tax to HMRC as the total estate was over £1M.

You seem pretty confused about tax in general .

An inheritance you receive is not taxable . The estate it came from may have had to pay inheritance tax which would reduce its size, but you personally as the receiver of inherited money have no tax liability on it.

 needed to get my money into a tax wrapper fast,

As Bowlhead has explained in detail , investing in a SIPP when you have insufficient/no taxable income was a big mistake .So you have in fact invested in a tax wrapper that gives a negative tax result

What's done is done but future investments should be outside a SIPP, until you have sufficient earnings to benefit from the tax relief.

Is it possible for OP to completely back out this transaction, explaining it was a mistake?

Then he could put it in an ISA, which would have been a far better choice?