Does a SIPP Income Tax you twice?? Self Employed Question.

Bachelorplace

As a self employed person, let's say you have a net profit of £10k - all of which you put into a SIPP. Then the government add their top up. 

When you want to draw down later some of the money I am led to believe this is also then subject to income tax.

Surely if you have paid tax on the earnings leading to your NET profit of £10k being invested, why would you need to pay income tax again when you want to spend it. 

If they are referring to taxing the pension's gains, some of which is money they gave you, I get that a bit. 

But is that not then CGT!?

Dazed_and_C0nfused

If you have a net profit of £10,000 then you yourself can only pay £8,000 into the SIPP, the basic rate tax relief of £2,000 makes it up to £10,000.

When you come to take income from the pension 25% can be taken as a TFLS and 75% is taxable.

The tax due on that 75% will depend on what other taxable income you have in the tax year in question.

It is possible to pay £8,000 and get £10,000 back if you time it right.

HHarry

Because the Government ‘top up’ is the tax being ‘refunded’.

So in effect you haven’t paid any tax on the money in your pension. And when you come to take it out you can have 25% tax free.

dunstonh

As a self employed person, let's say you have a net profit of £10k - all of which you put into a SIPP. Then the government add their top up. 

Its not a top up. it is a tax relief.   £10,000 into a pension would cost £8000 as the relief reduces the contribution.  A £12500 contribution would cost £10,000 net due to the tax relief.

When you want to draw down later some of the money I am led to believe this is also then subject to income tax.

Only on 75% of it.  25% is tax free.  And only on the amounts above your personal allowance.

Surely if you have paid tax on the earnings leading to your NET profit of £10k being invested, why would you need to pay income tax again when you want to spend it. 

The tax relief offsets the tax paid.

If they are referring to taxing the pension's gains, some of which is money they gave you, I get that a bit. 

There are no capital gains tax, dividend tax or inheritance on pensions.  

Bachelorplace

Some experts here! Advanced stuff. 

I have emailed my accountant - as I am still lost. 

And surely why is only 25% of your money in your pension tax free? When you have made the contributions from you're already taxed money. 

I get the Harry comment that is the simple way so thanks. But why bother what on earth is the advantage of bothering?

The article I read mentioned "top up" so I was a bit misled there too. 

Dazed_and_C0nfused

Because that is the law, if you disagree speak to your MP.

Even if you are a basic rate taxpayer now and expect to be in retirement then contributing to a SIPP or personal pension has a 6.25% benefit

dunstonh

And surely why is only 25% of your money in your pension tax free? When you have made the contributions from you're already taxed money. 

You are forgetting the tax relief.  When you contribute you get tax relief that gives you back the tax you have paid.        

molerat

And surely why is only 25% of your money in your pension tax free? When you have made the contributions from you're already taxed money.

Contributions into pensions are tax free.  If you pay in using taxed money you get the tax back one way or another.

MoneyGeoff

You don’t pay tax on pension contributions or if you’ve already paid tax the gov refund it. With a Sipp you pay tax on the way out whereas with an ISA you pay tax on the way in and no tax on the way out.

Lets say you have 10K net profit and you spend 2K and invest the remaining 8K.

1. If you pay the 8K into a Sipp the gov refund the tax you paid, so 10K goes into your Sipp. It would grow over time but let’s say it’s still worth 10K when you come to draw it down. 25% is tax free, ie 2.5K. The 7.5K is taxable but at the point you withdraw you might be a non tax payer, in which case you get the whole 10K back. If you are a 20% tax payer you’d get 2.5K tax free plus 6K after tax so 8.5K.

2. You decide to use an ISA instead. 8K goes in which you’ve already paid tax on. No tax to withdraw so you get 8K back (in reality it would have grown over time by the same amount as a Sipp in you invested in the same fund)

So the Sipp returns either 10K or 8.5K depending on your tax situation. The ISA returns 8K. Which is best?

marlot

A pension is a saving scheme that simply defers tax.

You can put money in from either gross pay or net pay (depending on the scheme).  If from net pay, you get a credit of the tax you've paid.

When it comes time to draw down the pension, there is a very generous tax break which means that you only pay tax on 75% of each payment.

Dazed_and_C0nfused

With the added bonus for some that there is no tax paid in the first place but they still get basic rate tax relief added to the pension fund.