Non-earner HR tax relief on £3600 Pens contribution?

Simes122

If non-earned pension income is liable to HR tax in retirement, is HR tax relief available on the £3600 gross pension contribution allowable as a non earner?

I get that ordinarily if you pay in 2880 to a SIPP, it would be grossed up to 3600 automatically with 20% relief.  If pens income were sufficiently higher than the HR tax threshold presumably one can claim further relief on the contribution via tax return?

Im in Scotland so the HR threshold is lower - £43663 (41% band)

so if taxable pension income was at least £47263 gross would 41% relief be available on the annual SIPP contribution?  If so would one still contribute 2880 and then claim relief via tax return?

Grateful for thoughts - the lower HR threshold is costly in net pay terms for a pensioner in Scotland so trying to find a way to mitigate some of the 41% rate. Simon

Dazed_and_C0nfused

Do you have to complete a Self Assesment return for some reason or are you under the impression it is necessary to obtain higher rate tax relief on pension contributions?

And I'm not aware of any legislation that precludes you from receiving an increased basic rate band* if your only income is from non pensionable sources such as pensions and investment income

*that is how relief at source pension contributions impact your personal income tax position

SomeMadeUpName

Your standard rate band for tax purposes would be increased by £3,600.

Not sure of the Scottish numbers but in England the £37,500 for 20/21 goes up to £41,100.  So with a personal allowance as well of £12,500 you would only pay HR on income over £53,600.

That would reduce the amount of income you have to pay HR on (whether it is earned or not).

Not sure how this would practicably be achieved without an SA return (as I've done one every year since I was 16) but there must be a mechanism I imagine.

SomeMadeUpName

I guess if you don't/didn't do an SA return then the reduction in tax would be done by an adjustment of your tax code with your pension provider.

Simes122

Dazed_and_C0nfused said:

Do you have to complete a Self Assesment return for some reason or are you under the impression it is necessary to obtain higher rate tax relief on pension contributions?

And I'm not aware of any legislation that precludes you from receiving an increased basic rate band* if your only income is from non pensionable sources such as pensions and investment income

*that is how relief at source pension contributions impact your personal income tax position

i complete a SA return. Probably don’t need to but Hmrc have never told me I don’t need to and I’m just trying to maximise my net income and claim any reliefs that are available. I haven’t yet retired (next March). My incomes at that point will be: Forces DB pension (in payment now) c£35.5k And a hybrid Occupational pension: DB element c£3.5kpa DC pot that will be around £170k I want to draw down the latter at a rate over the 9.5 years I’ll have until state pension kicks in, that maximises my overall net income, but minimises the amount of tax I pay.

Simes122

SomeMadeUpName said:

Your standard rate band for tax purposes would be increased by £3,600.

Not sure of the Scottish numbers but in England the £37,500 for 20/21 goes up to £41,100.  So with a personal allowance as well of £12,500 you would only pay HR on income over £53,600.

That would reduce the amount of income you have to pay HR on (whether it is earned or not).

Not sure how this would practicably be achieved without an SA return (as I've done one every year since I was 16) but there must be a mechanism I imagine.

In Scotland (inc pers allowance) the threshold is much lower for HR tax at 41% - earnings over £43663 pay 41%.

Simes122

I can’t get my head around if it’s worth it.  I think the effect is that the SIPP rises by £3600 for a net cost of £2553

the £3600 can be taken out with 25% tax free.  (£900) and £2700 taxed at 41% = £1593 net + £900= £2493. 

If I’d just taken £3600 at 41% I’d net £2124.  So it appears doing this via the SIPP would result in an advantage of £369pa to me vs taxman.

Albermarle

Simes122 said:

I can’t get my head around if it’s worth it.  I think the effect is that the SIPP rises by £3600 for a net cost of £2553

the £3600 can be taken out with 25% tax free.  (£900) and £2700 taxed at 41% = £1593 net + £900= £2493. 

If I’d just taken £3600 at 41% I’d net £2124.  So it appears doing this via the SIPP would result in an advantage of £369pa to me vs taxman.

I would have thought for £369 it was worth it .

Simes122

Albermarle said:

Simes122 said:

I can’t get my head around if it’s worth it.  I think the effect is that the SIPP rises by £3600 for a net cost of £2553

the £3600 can be taken out with 25% tax free.  (£900) and £2700 taxed at 41% = £1593 net + £900= £2493. 

If I’d just taken £3600 at 41% I’d net £2124.  So it appears doing this via the SIPP would result in an advantage of £369pa to me vs taxman.

I would have thought for £369 it was worth it .

Absolutely - but I’m not sure if my calculations are right or if HR relief is allowable in the way I think it might be.

Dazed_and_C0nfused

Simes122 said:

Albermarle said:

Simes122 said:

I can’t get my head around if it’s worth it.  I think the effect is that the SIPP rises by £3600 for a net cost of £2553

the £3600 can be taken out with 25% tax free.  (£900) and £2700 taxed at 41% = £1593 net + £900= £2493. 

If I’d just taken £3600 at 41% I’d net £2124.  So it appears doing this via the SIPP would result in an advantage of £369pa to me vs taxman.

I would have thought for £369 it was worth it .

Absolutely - but I’m not sure if my calculations are right or if HR relief is allowable in the way I think it might be.

As you already complete Self Assessment returns there is an easy way to check.

Start completing your 2020:21 return but enter the income you expect to receive in 2021:22 and take a look at the calculation.  Note the bottom line.

Then add in the relief at source pension contribution you expect to make in 2021:22 and take a look at the updated calculation.  Note the new bottom line and the difference will give you an idea of the higher rate tax relief you would benefit from.  You should see an increased basic rate band within the body of the calculation.

Then discard the return before accidentally filing it 

jem16

Simes122 said:

Albermarle said:

Simes122 said:

I can’t get my head around if it’s worth it.  I think the effect is that the SIPP rises by £3600 for a net cost of £2553

the £3600 can be taken out with 25% tax free.  (£900) and £2700 taxed at 41% = £1593 net + £900= £2493. 

If I’d just taken £3600 at 41% I’d net £2124.  So it appears doing this via the SIPP would result in an advantage of £369pa to me vs taxman.

I would have thought for £369 it was worth it .

Absolutely - but I’m not sure if my calculations are right or if HR relief is allowable in the way I think it might be.

Yes it works in exactly that way. I'm a Scottish Intermediate taxpayer so claim the additional 1% tax relief via my tax return. It increases my Basic Rate band so I pay slightly less tax. Same will happen for the extra 21% you will be claiming.

I have no earned income just like you and use my £3600 to pay into a pension. £2880 is paid in and BR tax relief applied.