Basic Rate limit Increased by Sipp Contributions

sirarthur

If as a self employed person I earn £55000 I would normally expect to pay 40% tax on the £5000 above my £12500 allowance and £37500 basic rate tax band. If I paid £5000 gross SIPP contributions would this mean all the tax owed would be at 20% because of an increase in my basic rate tax band of £5000? If so, is there a limit at which you can increase the band from pension contributions before the 40% rate would come in?

Hope this makes sense as i get confused by tax and pension stuff.

Dazed_and_C0nfused

Yes, your basic rate band would be increased by £5,000.  The tax on your business profits would all then be taxed at 20%.

But any other income such as interest or dividends would still fall into the higher rate band, albeit some would be taxed at 0% (within the higher rate band).

You pay over £4,000 to the pension company and they add the £1,000 basic rate tax relief.

There is no basic rate limit as such but the pension contributions you can make have limits.

sirarthur

Thanks so much for your reply. So as far as limits go, if I earned £75000 profits from income (not dividends etc) and paid in £25000 to the SIPP would that still mean it would be taxed at 20%? I'm curious at what point the band keeps increasing. Is it just on the contribution limit per year?

Dazed_and_C0nfused

It is increased by the gross amount of any relief at source pension contributions and the gross amount of any qualifying Gift Aid payments.

So there is no limit on the basic rate band as such, but pension contributions and Gift Aid (I think) has limits so I guess in theory the basic rate limit would be £37.5k plus the maximum possible gross relief at source pension contribution (£160k?) plus the maximum possible Gift Aid contribution (if there is even a limit on this).

If you have pensionable earnings (business profits or employment income) of £75k and contributed £25k gross your basic rate band would be increased by £25k.

sirarthur

Thanks for clearing this up for me. Much appreciated