Tax allowance on pension contributions confusion

Lexx55

I start collecting the state pension in April 2021 and I will also start receiving a small pension from a previous employer in April. I am already receiving a pension from another previous employer. I am still employed in the care sector and will continue to carry on working, I do not have any pension contributions deducted from my pay at present as I also have a SIPP fund in place and I opted out of the pension scheme offered to me by my employer. My total gross income once the pensions start will place me in the higher tax bracket as it will exceed £50k. In order to stay under the higher tax bracket limit I am planning to contribute 24% of my salary to my SIPP pension fund on a monthly basis (i.e. £600 a month deducted at source), my employer will not be contributing though as I opted out of the scheme. I am confused though about the tax rules around the pension contributions. Will paying a lump sum to my SIPP pension fund on a monthly basis actually reduce my taxable income to under the higher tax bracket as I hope? Will I get tax relief on the contributions I will make to my SIPP pension fund? Any help would be appreciated.

Albermarle

 I opted out of the pension scheme offered to me by my employer.
my employer will not be contributing though as I opted out of the scheme

Why are you refusing free money ? 

The money you contribute to a SIPP will automatically have basic rate tax relief added to it by the provider.

You then need to in form HMRC about your total gross pension contributions and they will refund any higher rate tax relief you are owed to you ( not direct to the pension ). Then they will adjust your future tax code on the assumption you will make similar contribution in subsequent tax years ( so you will get a higher net/take home pay  and no need for future refunds)

Dazed_and_C0nfused

Will paying a lump sum to my SIPP pension fund on a monthly basis actually reduce my taxable income to under the higher tax bracket as I hope? Will I get tax relief on the contributions I will make to my SIPP pension fund?

No, contributions to a SIPP (relief at source pension method of contributing) do not have any impact on your taxable income.

They do however increase your basic rate tax band which means more income gets taxed at 20% and less at 40%.

When you make a contribution the pension company adds 25% which ensures you get basic rate tax relief.

For example you contribute £4,000, they add £1,000 giving you a pension fund of £5,000.

£5,000 x 20% (basic rate tax rate) = £1,000.

If you pay enough higher rate tax this could save you an extra £1,000 in personal income tax as you will be paying 20% on £5,000 rather than 40%.

HMRC only ever allow tax relief on pension contributions for the tax year they are paid in however as Albermarle says they may well adjust the next year's tax code on the assumption that you are going to make similar contributions again. 

xylophone

I opted out of the pension scheme offered to me by my employer.

Why? Surely you are voluntarily foregoing the employer's contribution (accepting a pay cut)?

Lexx55

Many thanks for the answers, it is clear to me that I need to get the advice of a financial adviser as I still can’t get my head round how the tax works so will be contacting a local chap about all this. As for the reason for me opting out of my employers pension scheme option, it was done so as to save my employer losing out. My employer receives social care funding from the council to purchase care, if I took the pension option, the council refused to guarantee meeting the additional cost of employer pension contributions which would mean the individual in question would have to reduce the amount of care that could be purchased. I was not prepared to put my employer through that dilemma so as I already have some pension provision I opted out. Yes, it is giving up ‘free money’ but an individual’s care needs come first in my book. Proves the point that social care drastically needs a shake up, but that is another completely different subject.

joan1234

Dazed_and_C0nfused said:

Will paying a lump sum to my SIPP pension fund on a monthly basis actually reduce my taxable income to under the higher tax bracket as I hope? Will I get tax relief on the contributions I will make to my SIPP pension fund?

No, contributions to a SIPP (relief at source pension method of contributing) do not have any impact on your taxable income.

They do however increase your basic rate tax band which means more income gets taxed at 20% and less at 40%.

When you make a contribution the pension company adds 25% which ensures you get basic rate tax relief.

For example you contribute £4,000, they add £1,000 giving you a pension fund of £5,000.

£5,000 x 20% (basic rate tax rate) = £1,000.

If you pay enough higher rate tax this could save you an extra £1,000 in personal income tax as you will be paying 20% on £5,000 rather than 40%.

HMRC only ever allow tax relief on pension contributions for the tax year they are paid in however as Albermarle says they may well adjust the next year's tax code on the assumption that you are going to make similar contributions again. 

Hello I am in similar position, the HMRC site mentions if you are taking pension and contributing pension your annual allowance drops from £40,000 to £4,000. Is this isolated to drawing pension from DC schemes? Or any schemes? Thank you in advance. 

Notnewnotold

joan1234 said:

Dazed_and_C0nfused said:

Will paying a lump sum to my SIPP pension fund on a monthly basis actually reduce my taxable income to under the higher tax bracket as I hope? Will I get tax relief on the contributions I will make to my SIPP pension fund?

No, contributions to a SIPP (relief at source pension method of contributing) do not have any impact on your taxable income.

They do however increase your basic rate tax band which means more income gets taxed at 20% and less at 40%.

When you make a contribution the pension company adds 25% which ensures you get basic rate tax relief.

For example you contribute £4,000, they add £1,000 giving you a pension fund of £5,000.

£5,000 x 20% (basic rate tax rate) = £1,000.

If you pay enough higher rate tax this could save you an extra £1,000 in personal income tax as you will be paying 20% on £5,000 rather than 40%.

HMRC only ever allow tax relief on pension contributions for the tax year they are paid in however as Albermarle says they may well adjust the next year's tax code on the assumption that you are going to make similar contributions again. 

Hello I am in similar position, the HMRC site mentions if you are taking pension and contributing pension your annual allowance drops from £40,000 to £4,000. Is this isolated to drawing pension from DC schemes? Or any schemes? Thank you in advance. 

DC schemes only. And even then, the £4000 MPAA limit only kicks in if you have taken anything more than the 25% tax free amount from within those DC schemes.

AlanP_2

Lexx55 said:

Many thanks for the answers, it is clear to me that I need to get the advice of a financial adviser as I still can’t get my head round how the tax works so will be contacting a local chap about all this. As for the reason for me opting out of my employers pension scheme option, it was done so as to save my employer losing out. My employer receives social care funding from the council to purchase care, if I took the pension option, the council refused to guarantee meeting the additional cost of employer pension contributions which would mean the individual in question would have to reduce the amount of care that could be purchased. I was not prepared to put my employer through that dilemma so as I already have some pension provision I opted out. Yes, it is giving up ‘free money’ but an individual’s care needs come first in my book. Proves the point that social care drastically needs a shake up, but that is another completely different subject.

I sincerely admire your ethical stance. It sounds like your "employer" is an individual (that you provide care for) as opposed to an employer in the more commonly used sense (an organisation of some kind).

If you feel that an Independent Financial Adviser will asist then no problem but I think between us all on here we can clarify the "confusion" you still have.

What D&C is saying is that your £50k+ taxable income is not reduced by contributions to a SIPP but the band of income taxable at 20% is increased.

Asuming £55k then £12,500 personal allowance is tax free, the next £37,500 is taxable at 20% leaving £5k taxable at 40%.

Pay £5k gross in to a SIPP then £12,500 personal allowance is tax free, the next £42,500 is taxable at 20% leaving £0 taxable at 40% (which gives you the effective 20% HR tax relief)

For many people the simple logic of thinking that SIPP contributions reduce taxable pay works in practice but falls down if there are other types of taxable income e.g. from a BTL, savings interest and/or things like Child Benefit are factors outside the PAYE system.

Albermarle

Firstly the explanation of why you are  forgoing employer pension contributions , is very noble, if not a little unusual !

 it is clear to me that I need to get the advice of a financial adviser as I still can’t get my head round how the tax works so will be contacting a local chap about all this. 

It is unlikely that an IFA will be OK just to dispense some relatively simple tax advice . They will probably want to manage your pension and investments as well, for an ongoing fee of course .

Not sure if you mentioned earlier in the thread how much money is involved but most IFA's are not really interested in anything below £50K , more in some areas of the country .

Probably best to reread the thread and try again to get your head around the tax yourself.

dunstonh

It is unlikely that an IFA will be OK just to dispense some relatively simple tax advice . They will probably want to manage your pension and investments as well, for an ongoing fee of course .

IFAs do offer transactional advice.  However, some firms focus on ongoing.   The main problem is that the OP is an opt-out.   So, retirement planning advice would require a pension transfer specialist as opt-outs fall under that.  That won't be cheap.

MallyGirl

conbrio said:

.i am closing my business this financial year. Although there is no income there is money in the company, can it make a payment into my SIPP for this year and if so, the maximum £40,000 or a lesser mount and if not, can I make a personal contribution? Again a full or a lesser amount?
Thank you

I will split this out into its own thread as it does not relate to the issue being discussed above