Tax allowance on pension contributions confusion

dunstonh

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

You should ask on your own thread rather than tagging your question onto someone elses thread on an unrelated subject.  Otherwise, you risk taking over their conversation or the thread can get messy by having multiple conversations going on at the same time.

Marcon

Notnewnotold said:

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.

Only if you 'flexibly access' anything above the 25%. If you use the remaining 75% to buy an annuity, the MPAA isn't triggered because that doesn't count as flexible access.

Lexx55

AlanP_2 said:

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.

AlanP_2, thanks for the information and yes you are right, the person I am employed by is an individual. Reading through the other answers I have had I think I just about get it now. I have looked through quite a bit of information now and I think a Salary Sacrifice arrangement could well be the answer with my employer paying the sacrificed amount into my SIPP. Please let me know if you agree/disagree. If I have got this right, by sacrificing 24% of my salary (£600 a month) it will reduce the amount of tax I would pay because I wouldn’t have to pay the 40% tax rate on any of my income. It should also reduce the amount of employers National Insurance contributions that would have to be paid (potentially saving my employer a bit of money), although I am not sure how that would work because when I hit 66 I won’t be paying NI.

However, there is still one thing puzzling me though. My wife transferred some of her tax allowance to me under the Married Persons arrangement a few years ago because she has very little income. My understanding is that I will lose that allowance if my total income exceeds £50k placing me in the higher (40%) tax bracket. I expect my total income from pensions and salary to be around £57k as from April. Will sacrificing the 24% of my salary keep me out of the higher tax bracket so I could keep the married allowance?

zagfles

Lexx55 said:

AlanP_2 said:

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.

AlanP_2, thanks for the information and yes you are right, the person I am employed by is an individual. Reading through the other answers I have had I think I just about get it now. I have looked through quite a bit of information now and I think a Salary Sacrifice arrangement could well be the answer with my employer paying the sacrificed amount into my SIPP. Please let me know if you agree/disagree. If I have got this right, by sacrificing 24% of my salary (£600 a month) it will reduce the amount of tax I would pay because I wouldn’t have to pay the 40% tax rate on any of my income. It should also reduce the amount of employers National Insurance contributions that would have to be paid (potentially saving my employer a bit of money), although I am not sure how that would work because when I hit 66 I won’t be paying NI.

Yes. Employers still pay NI after you turn 66 so it would save them. Note that it's important you tell your SIPP provider that it's employer contributions, otherwise they'll claim tax relief you're not entitled to and it'll cause all sorts of hassle.

However, there is still one thing puzzling me though. My wife transferred some of her tax allowance to me under the Married Persons arrangement a few years ago because she has very little income. My understanding is that I will lose that allowance if my total income exceeds £50k placing me in the higher (40%) tax bracket. I expect my total income from pensions and salary to be around £57k as from April. Will sacrificing the 24% of my salary keep me out of the higher tax bracket so I could keep the married allowance?

Yes, but be careful with this. As long as your taxable income is below £50k it'll be OK but bear in mind that taxable income will include any interest or dividends even if they are within the savings/dividends allowance. For instance, if your income from pensions and employment is £49,900 and you have £102 bank interest, you'll be classed as a higher rate taxpayer even though you pay no higher rate tax, and so lose the marriage allowance.

The other thing that you should check, as well as the MPAA mentioned above, is recycling rules. Did you/will you get a tax free lump sum from any of the pensions you're starting to take? If so, there are rules to stop people "recycling" lump sums into another pension by increasing their pension contributions substantially. Google "HMRC recycling rules" for several helpful articles.

Dazed_and_C0nfused

For instance, if your income from pensions and employment is £49,900 and you have £102 bank interest, you'll be classed as a higher rate taxpayer even though you pay no higher rate tax, and so lose the marriage allowance.

Marriage Allowance wouldn't be lost on that situation.

But it would be if you replaced the interest (or added to it) with £1 or more of dividend income.

See explanation here,

https://www.litrg.org.uk/tax-guides/tax-basics/what-tax-allowances-am-i-entitled

zagfles

Dazed_and_C0nfused said:

For instance, if your income from pensions and employment is £49,900 and you have £102 bank interest, you'll be classed as a higher rate taxpayer even though you pay no higher rate tax, and so lose the marriage allowance.

Marriage Allowance wouldn't be lost on that situation.

But it would be if you replaced the interest (or added to it) with £1 or more of dividend income.

See explanation here,

https://www.litrg.org.uk/tax-guides/tax-basics/what-tax-allowances-am-i-entitled

We've discussed this before. That's not the experience of people on the very long marriage allowance thread. Personally I wouldn't risk it.

Notnewnotold

Marcon said:

Notnewnotold said:

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.

Only if you 'flexibly access' anything above the 25%. If you use the remaining 75% to buy an annuity, the MPAA isn't triggered because that doesn't count as flexible access.

Yes fair point - I'd mentally written off annuities given what poor value they represent, at least to me. But I guess some people still value the security they offer...