Pensions tax relief near the higher rate tax threshold

Plus

I'm trying to understand how tax relief works when the taxpayer is near the threshold for higher rate tax, in particular the reliefs that go away when you become a 'higher rate taxpayer'.

Suppose the threshold is £50,000.  The taxpayer earns £50,500 and wants to put £1000 in a pension. As I understand it:

• With salary sacrifice, the £1000 is deducted at source and the taxpayer now earns £49,500.  They pay basic rate tax.
• With a LISA, the taxpayer puts £800 of post-tax money into the LISA. The government adds 25%. They have £1000 in the LISA but their income is unaffected so they pay higher rate tax (on total salary of £50,500, meaning they pay £200 tax on the £500 above the threshold).

How does it work for a SIPP or personal pension?  The SIPP provider pays basic rate tax relief of 20%, and the taxpayer has to claim the higher rate relief.  But does the claiming that relief affect the taxpayer's rate status - ie is it like salary sacrifice in that it pulls down their income into the lower bracket?  Or is it simply a relief that provides cash but doesn't affect their income and thus their tax status?  In this example, would putting £1000 in a SIPP cause the taxpayer to pay basic or higher rate tax?

Dazed_and_C0nfused

With a SIPP (relief at source) contribution the gross contribution increases your basic rate tax band.

So if you pay over £1,000 the pension company adds the 25% uplift giving you a pension fund of £1,250.

And your basic rate tax band increased from £37,500 to £38,750.

Linton

With a personal pension/SIPP it is similar to your description of a LISA except that after the end of the tax year HMRC refund you personally (rather than your pension) with the £100 higher rate component of the £500 in the higher rate band.  The £200 of basic rate tax is what is returned to you as the 25% of the £800 net .

It is probably clearer with numbers:
No SIPP contribution:  £50500 earnings gives rise to £7500 tax at basic rate + £200 tax at higher rate
With £1000 gross SIPP contribution: you pay £800 into your pension.  HMRC add £200 and pay £100 back to you giving a total of £300 tax refunded.  So total tax paid=£7500+200-£300=£7400, total amount in pension=£1000
Compare with tax on £49500=£7400

Linton

Dazed_and_C0nfused said:

With a SIPP (relief at source) contribution the gross contribution increases your basic rate tax band.

So if you pay over £1,000 the pension company adds the 25% uplift giving you a pension fund of £1,250.

And your basic rate tax band increased from £37,500 to £38,750.

The OP wants £1000 in his pension so its £800 personal contribution + £200 basic rate tax refund.

Plus

Dazed_and_C0nfused said:

And your basic rate tax band increased from £37,500 to £38,750.

So that means you remain a 'basic rate taxpayer'? (with, for example, £1K personal savings allowance not £500)?  It's the order of the calculation that is my question, plus what HMRC mean when they say  'if you are a higher rate taxpayer...'

Dazed_and_C0nfused

You have to look at your tax position ignoring the savings nil rate band (aka Personal Savings Allowance) to firstly determine the maximum amount of savings nil rate band available.

Without knowing your full income details it's impossible to say but if we say you had £50,500 and £1,000 interest and contributed £1,000 (gross) to a relief at source pension then I would say you were still a higher rate payer and would have £500 of your interest taxed at 0%.

£51,500 total income

Personal Allowance £12,500
Increased basic rate band £38,500
Total before higher rate applies £51,000
Income would be taxed,
£12,500 no tax (Personal Allowance)
£38,000 x 20% (balance of earnings)
£500 x 0% (savings nil rate within basic rate band)
£500 x 40% (savings higher rate)