Earn above £100k, should I invest in SIPP?

amittal6

Hello all, I have been in little doubt on the investments in SIPP. Looking for help from this group on following scenario: 
Given salary 125k, salary sacrifice (3%), I read that if I made excess of everything 100k into SIPP, it will reduce the tax by restoring my 12500 personal limit, and provide govt relief. 

My question is if I invest 25k above 100k into SIPP, will I be paying tax on 100k or still on 125k just that personal allowance will be available because of net adjusted income? Is it worth blocking money for 20 years as I am 38? Will I be better off after contribution? Appreciate your valuable suggestions. 

Johnnyboy11

If I were you, I would put as much into a personal pension as possible each year. Currently limited by your salary (which is high) or the £40k Annual Allowance (you can also access unused AA from the last 3 tax years). You'll get your Personal Allowance restored and get 40% tax relief (20% added automatically to your pension and a further 20% back on application to HMRC). Remember you will pay tax on your pension when you withdraw it (25% is tax free), but chances are you won't be a high tax payer in retirement, so a massive saving in tax.

amittal6

Johnnyboy11 said:

If I were you, I would put as much into a personal pension as possible each year. Currently limited by your salary (which is high) or the £40k Annual Allowance (you can also access unused AA from the last 3 tax years). You'll get your Personal Allowance restored and get 40% tax relief (20% added automatically to your pension and a further 20% back on application to HMRC). Remember you will pay tax on your pension when you withdraw it (25% is tax free), but chances are you won't be a high tax payer in retirement, so a massive saving in tax.

Thanks Johnyboy11. I kind of gathered that investing in SIPP make more sense. However my head is around the real numbers. How much will I have to shell out - say 25K per year (i.e. 2083 per month) or less considering the tax relief etc. I see 20% govt will add but not that I get in hand NOW. But further 20% will be claimed on application to HMRC. So 5K refund received. Is there any template or xls which I can used to model. I am assuming net taxable income will also get reduced. So effectively by paying 25K, how much I am claiming back? How much is the current impact?

Dazed_and_C0nfused

I see 20% govt will add

It's 25% which gets added not 20%.  For example if you contribute £2,000 then basic rate tax relief of £500 is added giving you a pension fund of £2,500.

My question is if I invest 25k above 100k into SIPP, will I be paying tax on 100k or still on 125k just that personal allowance will be available because of net adjusted income?

No you will still have taxable income of £125k but you will be entitled to Personal Allowance of £12,500 (assuming your adjusted net income is £100k or less).

And your basic rate band will be increased from £37,500 to £62,500.

Note there is no extra 20% pension tax relief, the additional tax relief due is granted by your basic rate tax band being increased so the amount of personal tax saving depends on your overall tax position.

Dox

amittal6 said:

Hello all, I have been in little doubt on the investments in SIPP. Looking for help from this group on following scenario: 
Given salary 125k, salary sacrifice (3%), I read that if I made excess of everything 100k into SIPP, it will reduce the tax by restoring my 12500 personal limit, and provide govt relief. 

My question is if I invest 25k above 100k into SIPP, will I be paying tax on 100k or still on 125k just that personal allowance will be available because of net adjusted income? Is it worth blocking money for 20 years as I am 38? Will I be better off after contribution? Appreciate your valuable suggestions. 

Worth taking some proper professional advice from an IFA to see what other options you have. Free opinions are fine, but aren't based on anything like a full understanding of your situation.

amittal6

Thanks Dazed and Confused. Appreciate both your comments.

Increasing band is very helpful to know.

amittal6

Dox said:

amittal6 said:

Hello all, I have been in little doubt on the investments in SIPP. Looking for help from this group on following scenario: 
Given salary 125k, salary sacrifice (3%), I read that if I made excess of everything 100k into SIPP, it will reduce the tax by restoring my 12500 personal limit, and provide govt relief. 

My question is if I invest 25k above 100k into SIPP, will I be paying tax on 100k or still on 125k just that personal allowance will be available because of net adjusted income? Is it worth blocking money for 20 years as I am 38? Will I be better off after contribution? Appreciate your valuable suggestions. 

Worth taking some proper professional advice from an IFA to see what other options you have. Free opinions are fine, but aren't based on anything like a full understanding of your situation.

Happy to see suggestion on IFA. I am ready to pay but isn't sure how much would it cost and go where and find out really experienced people. Hence using these forums. Let me know if you have any pointers. Worth taking a paid advice to get full understanding and learn for my lifetime.

Johnnyboy11

There's an income tax calculator on these here forums that you could play around with...

Clive_Woody

amittal6 said:

Hello all, I have been in little doubt on the investments in SIPP. Looking for help from this group on following scenario: 
Given salary 125k, salary sacrifice (3%), I read that if I made excess of everything 100k into SIPP, it will reduce the tax by restoring my 12500 personal limit, and provide govt relief. 

My question is if I invest 25k above 100k into SIPP, will I be paying tax on 100k or still on 125k just that personal allowance will be available because of net adjusted income? Is it worth blocking money for 20 years as I am 38? Will I be better off after contribution? Appreciate your valuable suggestions. 

Your SS contribution of 3% seems quite low, are you at least paying in sufficient to ensure maximum pension contribution from your employer? I would suggest increasing your contribution significantly to reduce your tax burden but also to load up your pension pot to allow the option of retiring early if you so wish. Thinking of it as gift to your future self.

Albermarle

amittal6 said:

Dox said:

amittal6 said:

Hello all, I have been in little doubt on the investments in SIPP. Looking for help from this group on following scenario: 
Given salary 125k, salary sacrifice (3%), I read that if I made excess of everything 100k into SIPP, it will reduce the tax by restoring my 12500 personal limit, and provide govt relief. 

My question is if I invest 25k above 100k into SIPP, will I be paying tax on 100k or still on 125k just that personal allowance will be available because of net adjusted income? Is it worth blocking money for 20 years as I am 38? Will I be better off after contribution? Appreciate your valuable suggestions. 

Worth taking some proper professional advice from an IFA to see what other options you have. Free opinions are fine, but aren't based on anything like a full understanding of your situation.

Happy to see suggestion on IFA. I am ready to pay but isn't sure how much would it cost and go where and find out really experienced people. Hence using these forums. Let me know if you have any pointers. Worth taking a paid advice to get full understanding and learn for my lifetime.

An independent financial advisor will probably want an initial sum of a couple of grand? and another one for setting up a new pension /SIPP . Then around 0.7% each year to manage your pension/investments