SIPP - How/when should I claim higher rate tax relief and how will I receive it?

Dazed_and_C0nfused

foxfire said:

 Thanks all for your comments which have been incredibly helpful. However the following comments have left me a little confused and I’m now wondering whether I’m even entitled to higher-rate tax relief:

Dazed_and_C0nfused said:

4.  You need to ensure you are crystal clear about what you tell HMRC.  There is often a lot of ambiguity so just make things clear i.e. what the gross payment, inclusive of tax relief at source is and how much you expect to earn this year (taxable pay that will be on your P60 not your "salary").

I’ve just scraped into the higher rate tax bracket

Don't forget there is no automatic extra tax relief for higher rate payers.  The SIPP contribution just increases your basic rate tax band.  Which can mean less 40% tax is paid and you pay more at 20%.  Bit if you only pay higher rate tax on say £200 and contribute £3000 (gross) to your SIPP then the additional tax relief due is only going to be £40.

Dazed_and_C0nfused said:

Only things that might cause any issues are reference to Total Gross Pay.  You are taxed, and any tax relief due, is based on taxable pay i.e. the pay figure which goes on your P60.

I had assumed that because my salary is over the higher rate threshold (just) then that portion of it would be taxed at the higher rate. But I gather that I should instead use my taxable income to work out whether I‘m a higher rate tax payer. Presumably I have to wait for my P60 at the end of the year to find that out and see whether it is above the threshold?

Salary is usually irrelevant for tax purposes, it is taxable pay which matters.  This is usually shown on payslips, no need to wait for the P60 to understand how much you are earning throughout the year and how this compares to the higher rate threshold.

However you said “The SIPP contribution just increases your basic rate tax band”. Does this mean my SIPP contributions reduce my taxable income?
No, relief at source contributions to a SIPP do not reduce your taxable income.  They increase the amount of your basic rate tax band  The basic rate band in 2020:21 is £37,500.  If you contribute £4,000 gross (£3,200 from you plus the £800 basic rate tax relief added by the pension company) then your basic rate tax band will be increased from £37,500 to £41,500.

So I should take the taxable income figure in my P60 and minus my SIPP contributions (and basic-rate tax relief) for that year and if the resulting figure is over £50k only then I will be eligible for higher-rate tax relief?
No, to check if you are eligible for any higher rate tax relief you just need to compare your tax position without the pension contributions and then again with them included.  Amy difference is the additional (higher rate) tax relief you are entitled to.

So I could end up in a position where if I pay too much into my SIPP my taxable income is brought back into the basic-rate band so I don’t qualify for higher-rate tax relief and in theory could find myself worse off than if I had paid less into my SIPP to keep my taxable income above the higher-rate threshold?

No.  No idea where you are getting that idea from.  Worst case scenario is that you just get the 25% uplift from the pension company.  Lots of people contribute to pensions and only benefit from basic rate tax relief.

Finally, let’s say I am eligible for higher-rate tax relief - am I right in thinking that even though only some of my taxable income is taxed at 40% I would be entitled to higher-rate tax relief on all of my SIPP contributions?

No.  There is no automatic extra tax relief.  What you are suggesting would mean that you could be liable to higher rate tax on say £1 but get higher rate tax relief on pension contributions of say £10,000.  In reality you would only get higher rate tax relief on £1 of pension contributions.  A tax saving of 20p.

I may have completely got the wrong end of the stick with all this so would be grateful if someone could enlighten me...
You do seem confused.  The simplest way to explain this would be for you to actually provide some figures and then the tax consequences of contributing to a SIPP can be explained.  

Comments in bold.

foxfire

Dazed_and_C0nfused - Thanks for this. I think we should swap names 

So I finally managed to track down a payslip and my taxable pay for the month is £3876.84. I contribute £8k to my SIPP per year with £2k basic rate tax relief added via my SIPP provider. I gather this means I am still a basic rate tax payer and won’t need to bother writing to HMRC? I still don’t understand it though!

Dazed_and_C0nfused

foxfire said:

Dazed_and_C0nfused - Thanks for this. I think we should swap names 

So I finally managed to track down a payslip and my taxable pay for the month is £3876.84. I contribute £8k to my SIPP per year with £2k basic rate tax relief added via my SIPP provider. I gather this means I am still a basic rate tax payer and won’t need to bother writing to HMRC? I still don’t understand it though!

If the £3876.84 is representative of the whole tax year then your P60 will show taxable pay of c£46.5k so unless you are Scottish resident for tax purposes you would only be paying basic rate tax on your wage.

Unless you have more than £3.5k in other taxable income you won't be liable to any higher rate tax and as such there is no personal income tax benefit due to you from the SIPP contributions.

The basic rate tax relief added by the pension company does of course mean you have a pension fund of £10k in return for an initial outlay of £8k.

foxfire

If my taxable income was £50.5k and I put £8k + £2k basic rate tax relief into my SIPP, how much higher rate tax relief would I be due (if any)? Does the fact that the SIPP contribution increases the basic rate tax band have an impact?

hoc

Albermarle said:

NottinghamKnight said:

I've never found SA too 'taxing' it's quite straightforward and if you have simple affairs not too complicated. I try to complete by say July to ensure all info is available, typically takes around 3 weeks for HMRC to process and then a direct payment is made into my bank account, generally refund of higher rate tax and/ or VCT tax relief. 

I was always quite happy doing SA ( simple affairs but HRT )but I was told to stop this year . I have to request changes etc through my personal tax account but I preferred SA.

Told to stop doing SA by whom? HRMC?

Dazed_and_C0nfused

foxfire said:

If my taxable income was £50.5k and I put £8k + £2k basic rate tax relief into my SIPP, how much higher rate tax relief would I be due (if any)? Does the fact that the SIPP contribution increases the basic rate tax band have an impact?

It depends on what the taxable income consisted of.

If the whole £50.5k was employment income (pay or company benefits) then the higher rate tax relief is likely to be £100.

Your basic rate band would be increased from £37,500 to £47,500 meaning £500 of your earnings would be taxed at 20% instead of 40%.

If the taxable income was £50k employment income and £500 interest then the higher rate relief would be £0.  Your interest would move from being taxed within the higher rate band to within the basic rate band but the actual tax rate would remain 0% so no personal tax saving.

All of the above assumes you aren't Scottish resident for tax purposes.

Albermarle

hoc said:

Albermarle said:

NottinghamKnight said:

I've never found SA too 'taxing' it's quite straightforward and if you have simple affairs not too complicated. I try to complete by say July to ensure all info is available, typically takes around 3 weeks for HMRC to process and then a direct payment is made into my bank account, generally refund of higher rate tax and/ or VCT tax relief. 

I was always quite happy doing SA ( simple affairs but HRT )but I was told to stop this year . I have to request changes etc through my personal tax account but I preferred SA.

Told to stop doing SA by whom? HRMC?

Yes by HMRC . I think they are just trying to reduce the numbers doing SA.