SIPP and higher rate tax relief process

isayhello

Hi,

I've decided that after having an ISA that is full already for this year and already a workplace pension then it might be a good idea to start a SIPP as well. I just wanted to understand the process slightly better than I do.

Once I've picked a platform if I contribute £8k then after a short time the SIPP provider will automatically add £2k for tax relief into the account. If I'm a higher rate tax payer and employed, using paye, then if at the end of the tax year, I contact HMRC they will provide a 20% payment for extra tax relief?

Just wanted to check before finding a provider to do this.

Thanks

Dazed_and_C0nfused

There is no automatic extra 20% tax relief.

Using your example you will have a gross contribution of £10,000.

This would increase your basic rate band from £37,700 to £47,700 and your tax liability calculated using the increased basic rate band.

If you paid higher rate tax on say £2,000 then the maximum personal tax saving would be £400, you wouldn't get an extra 20% of the gross contribution.

Do you expect to need to complete a Self Assessment return for the tax year in question?

lisyloo

Yes correct, so it’s important to understand that extra tax relief would could back to your pocket from HMRC as opposed to going into your pension.

why a SIPP rather than the workplace pension?

if the workplace pension is paid by salary sacrifice then that’s a much better deal as you also save national insurance.
it also may be cheaper on charges if it’s a group scheme but that would need to be checked.

Dazed_and_C0nfused

There isn't necessarily any difference with a workplace pension.

What matters is the method used to contribute.

Beauty of salary sacrifice is that there is no pension tax relief, no need to tell HMRC anything etc as they are employer contributions.

Net pay is similar, you get the maximum possible tax relief at the point the contribution is deducted from your salary and never need to tell HMRC about it.

Relief at source does mean you need to claim any higher rate tax relief from HMRC.

isayhello

Dazed_and_C0nfused said:

There is no automatic extra 20% tax relief.

Using your example you will have a gross contribution of £10,000.

This would increase your basic rate band from £37,700 to £47,700 and your tax liability calculated using the increased basic rate band.

If you paid higher rate tax on say £2,000 then the maximum personal tax saving would be £400, you wouldn't get an extra 20% of the gross contribution.

Do you expect to need to complete a Self Assessment return for the tax year in question?

Sorry I didn't follow what you mean about increasing my basic rate band?
Are you saying if I made a gross contribution of £20k into a SIPP then my basic rate band goes up to £57,700? so I would only pay 20% on this?

How would this work if I tell HMRC this at the end of the tax year?

isayhello

Dazed_and_C0nfused said:

There isn't necessarily any difference with a workplace pension.

What matters is the method used to contribute.

Beauty of salary sacrifice is that there is no pension tax relief, no need to tell HMRC anything etc as they are employer contributions.

Net pay is similar, you get the maximum possible tax relief at the point the contribution is deducted from your salary and never need to tell HMRC about it.

Relief at source does mean you need to claim any higher rate tax relief from HMRC.

If it is relief at source, then am I in the same position as if I was contributing to a SIPP essentially?

tafelmoneysaver

isayhello said:

Dazed_and_C0nfused said:

There isn't necessarily any difference with a workplace pension.

What matters is the method used to contribute.

Beauty of salary sacrifice is that there is no pension tax relief, no need to tell HMRC anything etc as they are employer contributions.

Net pay is similar, you get the maximum possible tax relief at the point the contribution is deducted from your salary and never need to tell HMRC about it.

Relief at source does mean you need to claim any higher rate tax relief from HMRC.

If it is relief at source, then am I in the same position as if I was contributing to a SIPP essentially?

It is not the same but in the same ball park. As stated above if you salary sacrifice then you also make a saving on National Insurance. You cannot not reclaim this via the SIPP route. 

I contribute by both routes because that helps with budgeting. I use salary sacrifice for an amount I am comfortable paying each month, with manual contributions to my SIPP should a surplus build up in my cash account.  

Dazed_and_C0nfused

isayhello said:

Dazed_and_C0nfused said:

There is no automatic extra 20% tax relief.

Using your example you will have a gross contribution of £10,000.

This would increase your basic rate band from £37,700 to £47,700 and your tax liability calculated using the increased basic rate band.

If you paid higher rate tax on say £2,000 then the maximum personal tax saving would be £400, you wouldn't get an extra 20% of the gross contribution.

Do you expect to need to complete a Self Assessment return for the tax year in question?

Sorry I didn't follow what you mean about increasing my basic rate band?
Are you saying if I made a gross contribution of £20k into a SIPP then my basic rate band goes up to £57,700? so I would only pay 20% on this?

How would this work if I tell HMRC this at the end of the tax year?

Yes, if the gross contribution qualifying for basic rate tax relief was £20k then your basic rate tax band would increase from £37,700 to £57,700.

So potentially saving you £4,000 in income tax (an extra £20,000 taxed at 20% instead of 40%).  The exact tax saving depends on your taxable income and how much is normally due to be taxed at 40%.

Which means the real cost of that £20,000 contribution is only £12,000. You originally paid £16,000 and it's saved you £4,000 in personal income tax.

There can also be other benefits, the larger basic rate band may mean you become eligible for Marriage Allowance and the pension contributions also reduce your "adjusted net income", which is used to calculate any High Income Child Benefit Charge.

Albermarle

isayhello said:

Dazed_and_C0nfused said:

There isn't necessarily any difference with a workplace pension.

What matters is the method used to contribute.

Beauty of salary sacrifice is that there is no pension tax relief, no need to tell HMRC anything etc as they are employer contributions.

Net pay is similar, you get the maximum possible tax relief at the point the contribution is deducted from your salary and never need to tell HMRC about it.

Relief at source does mean you need to claim any higher rate tax relief from HMRC.

If it is relief at source, then am I in the same position as if I was contributing to a SIPP essentially?

If your contributions to your workplace pension are via relief at source, then it is the same as with a separate SIPP .

Most workplace pensions are fine for most people . There is sometimes a wrong assumption that a separate SIPP somehow must be better . So before opening a new pension you should be clear for what reasons you are doing it, and there are definite advantages for doing so .

isayhello

Dazed_and_C0nfused said:

Yes, if the gross contribution qualifying for basic rate tax relief was £20k then your basic rate tax band would increase from £37,700 to £57,700.

So potentially saving you £4,000 in income tax (an extra £20,000 taxed at 20% instead of 40%).  The exact tax saving depends on your taxable income and how much is normally due to be taxed at 40%.

Which means the real cost of that £20,000 contribution is only £12,000. You originally paid £16,000 and it's saved you £4,000 in personal income tax.

There can also be other benefits, the larger basic rate band may mean you become eligible for Marriage Allowance and the pension contributions also reduce your "adjusted net income", which is used to calculate any High Income Child Benefit Charge.

Thanks for explaining it's definitely helped but I'm still a bit lost so maybe an example like this might help me, if someone earns 60k then they pay 40% on some of it.

If they contribute 30k of that into a SIPP, then that pushes their BR from 37,700 to 67,700? so they would pay 20% on their entire salary?

How does this saving occur, for instance if you make that 30k lump sum payment into a SIPP now, and call HMRC, how is that 20% saving from 37,700-60,000 returned to you?

lisyloo

When you say entire salary Note there is a personal allowance of £12570 on which you pay 0% (ignoring any personal factors like benefits in kind), but yes you’d pay 20% on the rest.

HMRC can send you a refund if you have paid too much tax, but that wouldn’t be calculated until after the end of the tax year.
my P60s normally arrive in May.
so it would probably be July by the time it’s processed and paid.

what’s your reason for using a SIPP.

there are other factors but it’s clear the tax is easier if you use the workplace pension.

you might like to let your employer know they’d save 15.05% employer NI if they set up a salary sacrifice arrangement.

it’s admin but my employer saves about £6k on me alone.