How do SIPPs work?

longtimelurker2020

Completely ignorant about this topic, so hoping the knowledgable folks here can enlighten me: 

I currently have a workplace pension I contribute to via salary sacrifice, and am curious about SIPPs.

Are SIPP contributions made after tax ie I would transfer my contribution into my SIPP from my net pay, is that correct? If so how is the tax relief applied? 

I can’t imagine my employer would take on the administrative burden of a second salary sacrifice into my SIPP (if I had one, I don’t at the moment) 

Many thanks 

dunstonh

Are SIPP contributions made after tax ie I would transfer my contribution into my SIPP from my net pay, is that correct? If so how is the tax relief applied? 

SIPPs, personal pensions, stakeholder pensions and master trust schemes all work pretty much the same way.  The main difference is the investment options.
Individual pensions require you to make a gross contribution and the tax relief is handled at source by the provider.  e.g. £10,000 contribution to a SIPP (or other individual pensions) will see you pay £8,000. net of relief (England & Wales - different amount in Scotland).  If you are a higher or additional rate taxpayer, then you claim the extra back via HMRC.

I can’t imagine my employer would take on the administrative burden of a second salary sacrifice into my SIPP (if I had one, I don’t at the moment) Most individual schemes cannot comply with auto-enrolment requirements.  And most employers will not be willing to pay to an individual scheme as they would need to offer that to all employees.   Payroll software with one payment to a pension provider each month is enough without requiring multiple individual payments and no integration with payroll requiring manual admin work on each case.

longtimelurker2020

Thank you for explaining @dunstonh, pardon my ignorance but I have a couple of follow up questions:

Individual pensions require you to make a gross contribution and the tax relief is handled at source by the provider.  e.g. £10,000 contribution to a SIPP (or other individual pensions) will see you pay £8,000. net of relief To clarify, I'd make an £8k contribution, which would be reflected in my SIPP account as £10k? How can it be a gross contribution if it's coming out of my net income?

If you are a higher or additional rate taxpayer, then you claim the extra back via HMRC. Claimed back through my self-assessment? 

And most employers will not be willing to pay to an individual scheme as they would need to offer that to all employees. Yes, I didn't think so. 

pat1976

Info here
https://www.moneysavingexpert.com/savings/cheap-sipps/

Alexland

longtimelurker2020 said:

I currently have a workplace pension I contribute to via salary sacrifice, and am curious about SIPPs.

The salary sacrifice also saves the National Insurance so making additional contributions into your workplace pension will be more efficient than a direct contribution into a SIPP.

If you don't like the investment options in your workplace pension then some scheme rules allow partial transfers of lump sums into a SIPP, while remaining an active contributing member, for more choice and potentially lower costs (mostly on large amounts if you get your platform and investment selections right).

Albermarle

To clarify, I'd make an £8k contribution, which would be reflected in my SIPP account as £10k? How can it be a gross contribution if it's coming out of my net income?

Your £8K contribution would be net and the provider would add £2K basic rate tax relief. So your actual gross payment into the pension  would be £10K

If you are a higher or additional rate taxpayer, then you claim the extra back via HMRC. Claimed back through my self-assessment? 

For the first tax year you would claim back via self assessment or even just by informing HMRC directly. For subsequent tax years they would adjust your tax code on the assumption you will make the same level of contributions each year. So your net take home pay would increase. 

Dazed_and_C0nfused

In most cases you won't need to complete a Self Assessment return just to claim tax relief on pension contributions.

But if you already complete a return you have to include the contributions on the return irrespective of whether any higher rate tax relief is due or whether you have claimed relief provisionally through your tax code.

longtimelurker2020

Thanks very much for your explanations @Alexland, @Albermarle, and @Dazed_and_confused, it's all clear now
Thanks for the link @pat1976 I'll check it out 

MaxiRobriguez

Your salary sacrifice scheme is the most beneficial to you. If you have left over money at the end of every month you're not sure what to do with, then you should be increasing your salary sacrifice. 

jimjames

There is nothing to stop you having a SIPP alongside your salary sacrifice scheme but as above the salary sacrifice is most beneficial. I have one that has old pensions transferred into it but do make occasional top ups as well as maxing out the payments to my company scheme.

bermudianmark

SIPPs are a great way to invest in your choosen stocks / shares of funds with a long term view.  By the sound of things you are not very experienced at direct investment, in which case you may well be better using a convential pension.

If you regularly make CGT gains above the allowabce then a SIPP makes great sense, they are only really suitable for the more sophisticated investor.