Pension Tax Relief for High Earner - How does it work?

Simpleton101

Hi all,

First post on the website so please go easy.

For the first time in my career I'm starting to look at my pension more seriously and i have a few questions which I'm hopeful the MSE community can help me with.

Suppose the following:

• Resident in England
• Gross pay: £61000 (after salary sacrifice)
• Open a SIPP: Lump sum payment of £6330

From my understanding the private pension company will contact HMRC and reclaim basic rate tax relief at 20% for the lump sum amount into the SIPP. I would then need to contact HMRC to claim tax relief on the additional 20%. But here is where the confusion lies:

If HMRC provide additional tax relief on the £6330 will the amount they refund not need to be retaxed at 20% / 40% since:

61000-12750 = 48250 taxable pay
37700 -> 20% tax
10550 -> 40%tax = £6330 (goes into a SIPP)

So in effect:
£37700 -> 20% tax
20% of £6330 = £1266 (additional tax relief from HMRC because high earner)
£1266 now taxed again because falls into 40% category?

I hope this makes sense. Any help is welcome.

Many Thanks.

HappyHarry

Simpleton101 said:

Hi all,

First post on the website so please go easy.

For the first time in my career I'm starting to look at my pension more seriously and i have a few questions which I'm hopeful the MSE community can help me with.

Suppose the following:

• Resident in England
• Gross pay: £61000 (after salary sacrifice)
• Open a SIPP: Lump sum payment of £6330

From my understanding the private pension company will contact HMRC and reclaim basic rate tax relief at 20% for the lump sum amount into the SIPP. I would then need to contact HMRC to claim tax relief on the additional 20%. But here is where the confusion lies:

If HMRC provide additional tax relief on the £6330 will the amount they refund not need to be retaxed at 20% / 40% since:

61000-12750 = 48250 taxable pay
37700 -> 20% tax
10550 -> 40%tax = £6330 (goes into a SIPP)

So in effect:
£37700 -> 20% tax
20% of £6330 = £1266 (additional tax relief from HMRC because high earner)
£1266 now taxed again because falls into 40% category?

I hope this makes sense. Any help is welcome.

Many Thanks.

Welcome to the forums.

If you pay a lump sum of £6,330 to your SIPP, the provider will add tax relief of  £1,582.50

This makes a gross contribution  of £7,912.50

You would claim further tax relied via your tax return on the gross amount of £7,912.50, which would be another £1,582.50. This amount would either be deducted from your annual tax bill, or sent directly to you.

Simpleton101

Thanks for replying @HappyHarry

Noticed I've made a mistake in my calculations as you have correctly pointed out.

My question was really around the amount HMRC hand back into my pocket, will that not push me back into high earner category and why is no additional tax on said amount due?

HappyHarry

Simpleton101 said:

Thanks for replying @HappyHarry

Noticed I've made a mistake in my calculations as you have correctly pointed out.

My question was really around the amount HMRC hand back into my pocket, will that not push me back into high earner category and why is no additional tax on said amount due?

Your confusing earned income with a tax refund;

You have earned your income and paid tax on that income.

Due to your pension contributions, you have paid too much tax on your earned income.

HMRC are refunding some of the tax that you have paid. 

This refund of tax does not count as taxable income.

QrizB

Simpleton101 said:

My question was really around the amount HMRC hand back into my pocket, will that not push me back into high earner category and why is no additional tax on said amount due?

The £1582.50 that you get from HMRC isn't additional income, it's tax you've (over)paid on the income you've already declared.

Dazed_and_C0nfused

How does it work?

Firstly there is no fixed extra 20% for higher rate payers.

A gross relief at source contribution of £7,912 will increase your basic rate band from £37,700 to £45,612.

As a result more income can be taxed at 20% and less at 40%.

If no longer liable at higher rate you become eligible for Marriage Allowance (as transferor or recipient)

Although relief at source contributions don't reduce your taxable income they do reduce your adjusted net income.  The High Income Child Benefit Charge is based on ANI so you can get additional savings by a lower HICBC (if relevant).

Any personal tax savings always benefits you, it never gets added to your pension fund.  You will get a reduced tax bill/refund.

If you complete Self Assessment returns and are employed HMRC usually allow provisional relief via your tax code, the actual tax relief due is established from your return after the year ends.

Any tax relief allowed via your tax code is always for the tax year the code relates to, HMRC never allow tax relief on pension contributions in a different tax year.  

For example if you file a 2021:22 return next summer including relief at source pension contribution details you will get the tax relief for 2021:22 as part of your 2021:22 Self Assessment calculation.  

But HMRC will probably update your 2022:23 tax code.  That is provisionally allowing relief for 2022:23, it's not allowing any relief for 2021:22

Simpleton101

Thanks for the thorough explanation @Dazed_and_C0nfused . Your help on this board is much appreciated!

This leads me on to my next question. How do I maximise my earning via pension tax relief? In other words, with a salary of 61000 (gross - after salary sacrifice and now wanting to fund into a SIPP) how much should i contribute into a SIPP to avoid being taxed at 40%?

I am also looking to avoid the HICBC - 2 children within the household.

Dazed_and_C0nfused

Simpleton101 said:

Thanks for the thorough explanation @Dazed_and_C0nfused . Your help on this board is much appreciated!

This leads me on to my next question. How do I maximise my earning via pension tax relief? In other words, with a salary of 61000 (gross - after salary sacrifice and now wanting to fund into a SIPP) how much should i contribute into a SIPP to avoid being taxed at 40%?

I am also looking to avoid the HICBC - 2 children within the household.

If your P60 is going to show taxable income of £61,000 and there is no pension annual allowance issues then you would need to contribute £11,000 gross into a SIPP (£8,800 from you plus the basic rate relief of £2,200 added by the pension company).

That will increase your basic rate band from £37,700 to £48,700 meaning all income above the Personal Allowance is taxed at 20% (a personal tax saving of £2,146).

It will also reduce your adjusted net income to £50,000 and allow you to keep the full £1,827 Child Benefit.

So the real cost of that £11,000 pension fund is just £4,827 

If you have any other taxable income (company benefits, interest or dividends for example) then the figures will change, for example £100 of interest would be taxed at 0% courtesy of the savings nil rate of tax but your ANI would be £50,100 so you would need to pay 1% of the Child Benefit back.

SavingStudent1

Random question:

I know the OP specifically said they wanted to put a lump sum payment of £6330 into their SIPP, but for example, if they didn't have a SIPP, could they have avoid being taxed at 40% by just putting £11,000 more into their salary sacrifice pension scheme to reduce their taxable income to £51,000?

Also, is there a benefit of not doing the above and instead doing it as above i.e. (opening a SIPP) and putting £11,000 in there?

Marcon

SavingStudent1 said:

Random question:

I know the OP specifically said they wanted to put a lump sum payment of £6330 into their SIPP, but for example, if they didn't have a SIPP, could they have avoid being taxed at 40% by just putting £11,000 more into their salary sacrifice pension scheme to reduce their taxable income to £51,000?

Also, is there a benefit of not doing the above and instead doing it as above i.e. (opening a SIPP) and putting £11,000 in there?

1. The employer may limit how much can be salary sacrificed (and must limit it, if it takes someone's pay below minimum wage - clearly not an issue here). 
2. Having a SIPP gives greater flexibility in terms of retirement age, fund choice etc.

Simpleton101

Dazed_and_C0nfused said:

Simpleton101 said:

Thanks for the thorough explanation @Dazed_and_C0nfused . Your help on this board is much appreciated!

This leads me on to my next question. How do I maximise my earning via pension tax relief? In other words, with a salary of 61000 (gross - after salary sacrifice and now wanting to fund into a SIPP) how much should i contribute into a SIPP to avoid being taxed at 40%?

I am also looking to avoid the HICBC - 2 children within the household.

If your P60 is going to show taxable income of £61,000 and there is no pension annual allowance issues then you would need to contribute £11,000 gross into a SIPP (£8,800 from you plus the basic rate relief of £2,200 added by the pension company).

That will increase your basic rate band from £37,700 to £48,700 meaning all income above the Personal Allowance is taxed at 20% (a personal tax saving of £2,146).

It will also reduce your adjusted net income to £50,000 and allow you to keep the full £1,827 Child Benefit.

So the real cost of that £11,000 pension fund is just £4,827 

If you have any other taxable income (company benefits, interest or dividends for example) then the figures will change, for example £100 of interest would be taxed at 0% courtesy of the savings nil rate of tax but your ANI would be £50,100 so you would need to pay 1% of the Child Benefit back.

Marvelous. When you put it that way, I believe it's a no brainer. And you assumed right, there are no pensionable allowance issues.

Thanks again.