Tax relief question non tax payer

Dh6

Hi everyone, 

My wife works self employed part time. We’ve recently opened a SIPP for her which is mostly funded by my wages. 

Some years she might earn above the income tax threshold and others she may not.

How will this work in regards to the tax relief going into her pension?

If she’s not going to receive tax relief
we may as well pay the monthly fee into an ISA rather than her pension.

kind regards DH6

molerat

The income tax threshold is irrelevant.  She will be credited the income tax by the provider on whatever she puts in.  She is limited though to a gross total, what she puts in plus the tax credit, of whatever she earns.  As long as she does not go over that amount there is no problem.

Linton

Yes, one of the apparent benefits of a pension is that you get tax relief on tax you have not paid.  However it's not so good as it seems as you may well pay tax on it when it is withdrawn. However it is a useful bit extra if you are a non taxpayer in retirement.

Albermarle

The tax benefit of a pension compared to an ISA is a minimum 6.25% . The calculation is that if she adds £80 to a pension the provider adds £20 basic rate tax relief.  On withdrawal she will get 25% tax free and the rest taxed at 20% - in total £85 . If she was not a taxpayer when she took money from the pension she would get the full benefit of the tax relief, if her total income from work + pensions ( including state pension was below £12,500 per year.

Dh6

Thanks very much for the clarification, I thought I’d made a mistake in our planning!

What you have suggested Albermarle is exactly what we plan to do.

The above information is much appreciated. 

Thanks DH6 

Albermarle

Just to reinforce Molerats point .
If she earns say £10K only and pays no tax ( as she is under the £12,500 personal allowance ) she can add £8K to her pension and the provider will add £2K . (Some people mistakenly think they can add the full £10K ) 

Dh6

Thanks Albermarle, I didn’t know that, however, it’s only a £200 net payment per month we’re putting In so well under what she earns anyway.

Kind regards for your help

DH6