What happens if you accidentally pay more than 80% of your income into a SIPP?

itsmeagain

I'm just about to open a new Vanguard SIPP for my wife. She usually earns around 12.5kPA (self employed/part-time), meaning that we could put 10k into the new SIPP.
However, with the COVID/grant/etc uncertainties, what happens if she gets the SIPP tax allowance on the 10k (making 12.5k) and is later shown to have earned only 11.5k (for example)?

Dazed_and_C0nfused

What date are her business accounts made upto?

itsmeagain

Dazed_and_C0nfused said:

What date are her business accounts made upto?

She has done her 2018/2019 return and will soon do her 2019/2020 return. Why? Can you put in a contribution based on the previous years income (1 year offset)?

AlanP_2

itsmeagain said:

Dazed_and_C0nfused said:

What date are her business accounts made upto?

She has done her 2018/2019 return and will soon do her 2019/2020 return. Why? Can you put in a contribution based on the previous years income (1 year offset)?

No, contribution in the tax year is based on income in the tax year so no looking backwards.

zagfles

You need to tell the provider and ask for a refund of the excess. Alternatively you can leave it in and tell them to not to claim the tax relief. However it's against the T&Cs of most providers to pay in non relievable contributions because it's a hassle for them.

DT2001

In the past I have put in a lump sum in Nov/Dec for 80% of expected earnings and then put in a balancing amount in March when I know pretty much the final figure. 
If you found out your OH had slightly under earnt you could not declare all of your expenses. Your OH is below personal allowance so no extra tax - maybe a little NI depending on split between p/time and self employed.

Secret2ndAccount

DT2001 said:

In the past I have put in a lump sum in Nov/Dec for 80% of expected earnings and then put in a balancing amount in March when I know pretty much the final figure.

This     ↑↑

Also be aware, if your wife received any SEISS (1, 2, or 3) that counts as business income, and is eligible as income for pension tax relief purposes. The income must be declared in her April 2021 tax form (which you will probably complete later in 2021), so that pension contribution would need to be made before April 5th 2021.

Secret2ndAccount

Another alternative. Suppose you can afford to put away 10,000 but you are only sure 8,000 will qualify for relief. Put the 8000 into a SIPP and the other 2000 into an ISA.     To be clear, the SIPP is the more tax efficient way to go, and I am pro SIPP. However, if you don't want to worry about falling foul of the rules, the difference, for many people, is quite small. Although that 2000 gets no tax relief on the way into the ISA, it is totally tax free when you take it out. Meanwhile, if you are a taxpayer when you retire, you are going to pay tax on 75% of the withdrawal from the SIPP. So with the ISA, you lose the income tax on the way in; with the SIPP, you lose 75% of the income tax on the way out.

As I said, the difference is not that much. Meanwhile, if you were to have an urgent need for cash at age 50, it's a lot easier to cash in an ISA than a SIPP. On that point though, if you aren't sure you have the self discipline to leave the money in the ISA until you retire then the SIPP has the benefit that you can't get at the money until you are 55+.

Most ISA's offer the same range of investments as most SIPPs. Just keep an eye on your charges so that you are not paying double for having two products. Some ISA's are free. Others charge a percentage of the pot, so you are just paying a bit less in charges on your pension, and a bit more on your ISA.

Dazed_and_C0nfused

itsmeagain said:

Dazed_and_C0nfused said:

What date are her business accounts made upto?

She has done her 2018/2019 return and will soon do her 2019/2020 return. Why? Can you put in a contribution based on the previous years income (1 year offset)?

No you can't use the previous tax years income but if her business accounts were to say 31 December each year then it may be come January she will know her actual taxable profit for the current tax year.

But if she uses 31 March or 5 April year end then it gets a bit trickier to judge.

michaels

You can always pay back the extra relief on your tax return.

itsmeagain

Thanks everyone...