Marginal rate and tax threshold in retirement - Scotland

Simes122

Hi,

I’m trying to sanity check my tax planning for retirement next year.

I’m in Scotland and with my DB pensions I’ll be on around £39.5k while the HR tax threshold is £43662 (41%) so I have a little headroom to draw down my DC pot at intermediate rate - 21%.,  I’d like a little more headroom to be tax efficient and drawdown my DC pot more rapidly to give me back headroom when I reach SP age.

Am I right in saying that (in effect), if I drawdown sufficient from my DC pot to make my gross income £43662 + £3600, and put £2880 into a SIPP, then that’ll be grossed up to £3600 by the taxman, and I can claim further relief of £720 via my tax return, giving me a marginal rate of 21% up to an income level of £47262?

im not sure I am because ultimately I’m just moving from one DC pot to another, and I’ll be taxed at my then marginal rate when I withdraw, albeit I benefit  from a 25% tax free out of the SIPP and I think I make £369 from the taxman.  I’m wanting to understand if I have really extended my marginal rate or just stored the HR tax problem in the SIPP, I think!

Dazed_and_C0nfused

You cannot claim "further relief of £720".

Relief at source pension contributions do not entitle you to a fixed amount of additional relief, they increase your basic rate tax band meaning mor income can be taxed at 20/21% and less at 41%.  That is unlikely to result in additional relief of exactly £720. 

Not least because you will receive 20% relief from the pension company (courtesy of HMRC) but are avoiding paying 41% tax.

The tax due on the additional £3,600 in your SIPP will depend on what other income you have in the tax year you eventually withdraw it.

Simes122

Thanks, all understood.  Yes I can see that any actual saving (if any) will be dependent on the marginal rate applicable to the withdrawal whenever that occurs.  

Jeremy535897

There is also the saving you referred to earlier, based on the tax free lump sum element.

Simes122

Jeremy535897 said:

There is also the saving you referred to earlier, based on the tax free lump sum element.

Thanks, I'm not sure how I got £369 a year vs not doing it, assuming worst case withdrawal at 41%.

To Sipp - 2880.  Grossed up by Taxman 20% (£720) to £3600.  

BR allowance (I think) extended by £3600, meaning my 21% band saves me a further 20% (£720) through HR tax avoided. 

On withdrawal at 41% tax rate (which will be my marginal rate)

£3600 SIPP becomes £900 TF, and £2700 taxable and I'll have saved £720 tax through the increase to BR tax band (I think)

So my £2880 original investment is now £900 + £720 + £2700*0.59 = £3213 net which if I've done my sums right above is £333 for doing this vs not doing this?   I'm bound to have missed something!

Jeremy535897

You put £2,880 in, and reduce tax by £756, thus net cost is £2,124. You get the extra 1% tax relief. See:
https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/scottish-rates-of-income-tax-facts/

You take out £3,600 (assuming SIPP has not changed in value and there are no fees), of which £2,700 is taxable at 41%, so you receive £900 plus £1,593 = £2,493. 

Simes122

Brill - thanks for that - so I did get the right answer of £369 last night I just didn't know how lol.   

Well that's better than a poke in the eye with a sharp stick, and combined with my Wife's non taxpayer SIPP, it's over £1k per year from the Taxman for doing the SIPP thing.  Perfect!

KingOfSnake

All I would say is get professional advice - the Governemnt give it for free (I think it is called unbiased) - you need to be very careful of MPAA otherwise you can get stung for drawing down and paying into to get further tax relief. It is monumentally complex and easy to slip up on some unknown obscure legisation.

Jeremy535897

MPAA doesn't bite, even if the pension has been flexibly accessed, if your gross contribution is £4,000 or less. I can find nothing to suggest that future tax free lump sums would be denied (in respect of a contribution within the MPAA), but it is a complex area. The point is irrelevant if the pension is not flexibly accessed in the first place.

Simes122

Thanks - yes, am aware of MPAA restrictions.   I'm confident that this is my retirement - my DB provision is adequate to live comfortably even if the market crashed rendering my DC pot zero.  I've no intention to work again, and my wife has been retired for a while now due to ill health.  So MPAA isn't a constraint that affects me, as the constraints on contributions as a non-earner, are beneath the MPAA limit.