SIPP income tax refund and tax liability from life insurance

bd10

Hi all,

got a beginners question on SIPP and taxes here:

My situation is this:

A little old life insurance policy that I had taken out in Germany many years back will mature shortly and I will receive the cash value in my current account. Because it is a fund/capital based insurance I will be liable for some income tax on the capital gains accumulated to date. That sum I will transfer into my SIPP in the next few weeks. I am contemplating of transferring the full amount into the SIPP, but that all depends now on the tax.

When I file my tax return (higher rate) in January 2021, I will declare the capital gains for 20/21 from the matured life insurance. But I will also note down the amount paid into the SIPP for 20/21. As it stands, the 20% contribution to the amount to be paid into the SIPP will exceed the income tax due to capital gains.

Now I want to manage the cash flows. I can see two options:
(1) Set aside cash for the tax due on the insurance, keep it outside the SIPP.
(2) Set nothing aside, put everything in SIPP assuming that HMRC will be paying me a net of 20% income tax relieve less capital gains.

Will HMRC net both amounts off when the next payslip comes through after Jan '21? Or will they debit me the income tax on capital gains first and then credit me the 20% tax relief a few months later? How does this work?

Your thoughts and advise would be most appreciated.

Thanks