SIPP and higher rate tax relief process

isayhello

lisyloo said:

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.

Ah ok so it would be the first 37,700 after the 12570 that would be at 20% or 37,700 - 12570 that would be at the basic rate?

I have a workplace pension that I have used so the employer matches it to their max amount already. They don't do salary sacrifice.

If you're a higher rate tax payer and you could put just enough salary into a SIPP then to only pay basic rate tax on the entire salary, then it seems like an efficient way of saving tax as you could save thousands, I wonder if most people already do it.

If I did this before the end of this tax year, I would just contact HMRC and in your experience they have just sent you out a payment by July?

lisyloo

For 2021 the standard tax figures are
0-12570 is 0%
12571 - 50270 is 20%
50271 - 150000 is 40%

the personal allowance can change if there are other factors e.g. a taxable benefit like private medical insurance

you could suggest salary sacrifice as your employer will save employers NI which is 15.05% next year.
most employers are open to saving money (it’s a no brainer really).
i have been successful at this in the past although it was some effort to persuade people to do the admin. Maybe try to persuade the Person who will save the money and not the person who has to set it up.

yes 40% is very tax efficient
One reason people don’t do it is because they can’t always afford it.
note that you cannot get the money until 55/57 (or sometimes older) so for someone in their 20s that’s a very long time. It’s a bit different when you’re 54.

at 20% it’s still tax efficient
when you retire you get 25% tax free.
then 12570 per annum at 0% (or whatever the figure is at the time)
so there are still tax benefits at basic rate as well as being a good discipline to put money aside monthly.

essentially yes, you supply the details to HMRC (also any charity gift aid payments will move the tax band) and ask for a refund.
I can’t guarantee July - my point was you won’t get it immediately.
they need to process the calcs and then process the payment and you’ll be in a queue so expect a few months.
you can’t really submit the figures until you get your P60 which you need to wait for.
you can do it from your payslips but you could overlook something and then it won’t tie up with the figures HMRC have so not really worth it IMO.

i would be looking at putting more into the workplace scheme for the following reasons

1) tax will be sorted
2) one pension instead of 2 - which may cost you to consolidate later
3) your company scheme may have lower charges. It also might not but sometimes employers subsidise it or get a better deal than an individual.
4) the investment choices might be a bit easier with on pension rather than 2 with different choice

Tilb

Just to jump in on this thread a bit.......
By increasing my workplace pension contributions I can understand that I will be able to basically keep myself within the basic rate tax band (as I'm over it by a few thousand). But would this also mean I would still then be able to have my £1000 PSA or would I be in the reduced £500 PSA catagory? 

ColdIron

If you are a basic rate taxpayer you will be able to use the £1,000 Personal Savings Allowance

https://www.gov.uk/apply-tax-free-interest-on-saving

double_dutchy

I'm now retired but when I was working a few years back I used SIPP contributions to minimise 40% tax. I never had to claim the extra 20% back because I contacted HMRC in advance, via online chat, told them how much I intended to pay into my SIPP in the next financial year and the details of my salary and they adjusted my tax code (upwards) so I effectively claimed back the extra 20% by being taxed less PAYE

Tilb

But does making extra workplace pension contributions (say £15000 if I earn £60000) make me a basic rate taxpayer in relation to the PSA?

isayhello

lisyloo said:

For 2021 the standard tax figures are
0-12570 is 0%
12571 - 50270 is 20%
50271 - 150000 is 40%

the personal allowance can change if there are other factors e.g. a taxable benefit like private medical insurance

you could suggest salary sacrifice as your employer will save employers NI which is 15.05% next year.
most employers are open to saving money (it’s a no brainer really).
i have been successful at this in the past although it was some effort to persuade people to do the admin. Maybe try to persuade the Person who will save the money and not the person who has to set it up.

yes 40% is very tax efficient
One reason people don’t do it is because they can’t always afford it.
note that you cannot get the money until 55/57 (or sometimes older) so for someone in their 20s that’s a very long time. It’s a bit different when you’re 54.

at 20% it’s still tax efficient
when you retire you get 25% tax free.
then 12570 per annum at 0% (or whatever the figure is at the time)
so there are still tax benefits at basic rate as well as being a good discipline to put money aside monthly.

essentially yes, you supply the details to HMRC (also any charity gift aid payments will move the tax band) and ask for a refund.
I can’t guarantee July - my point was you won’t get it immediately.
they need to process the calcs and then process the payment and you’ll be in a queue so expect a few months.
you can’t really submit the figures until you get your P60 which you need to wait for.
you can do it from your payslips but you could overlook something and then it won’t tie up with the figures HMRC have so not really worth it IMO.

i would be looking at putting more into the workplace scheme for the following reasons

1) tax will be sorted
2) one pension instead of 2 - which may cost you to consolidate later
3) your company scheme may have lower charges. It also might not but sometimes employers subsidise it or get a better deal than an individual.
4) the investment choices might be a bit easier with on pension rather than 2 with different choice

Thanks @lisyloo for the great answer. If I have the following example correct then I have understood well.

In the scenario I gave earlier of salary at 67.7k, after the personal allowance the taxable amount would be 55130.

So to fall into the BR rate for the entire salary, if you contributed (55130-37700 ) 17430 into your own SIPP, then you would get 20% relief added onto this by the SIPP provider, approx 3.5k and when you inform HMRC then the entire 55130 would have been taxed at 20% instead of 17430 of it taxed at 40%, so another saving of 3.5k which is paid to you by HMRC?

If I've not worked any bits out correctly then please clarify.

Also agree with your points about using the workplace pension, I need to contact Aviva to find out if it Net pay or not. I guess the other benefit of the SIPP is the wider selection of options.

lisyloo

Tilb said:

But does making extra workplace pension contributions (say £15000 if I earn £60000) make me a basic rate taxpayer in relation to the PSA?

You’ll still be a basic rate taxpayer.

if your employer operates a “net pay” arrangement and puts your contributions in before taxing you then you don’t need to do anything.
If your employer operates a “relief at source” arrangement and taxes you before your contribution, then you’ll need to claim back the extra tax relief as the pension scheme will only do it at basic rate.
but either way you’ll still be a basic rate tax payer

you should be able to work this out from payslips and looking at what’s going in to your pension

lisyloo

So to fall into the BR rate for the entire salary, if you contributed (55130-37700 ) 17430 into your own SIPP, then you would get 20% relief added onto this by the SIPP provider, approx 3.5k and when you inform HMRC then the entire 55130 would have been taxed at 20% instead of 17430 of it taxed at 40%, so another saving of 3.5k which is paid to you by HMRC?

If I've not worked any bits out correctly then please clarify.

Also agree with your points about using the workplace pension, I need to contact Aviva to find out if it Net pay or not. I guess the other benefit of the SIPP is the wider selection of options.

£17430 is the correct figure (assuming no private medical, cars, charity contributions, wfh tax relief etc.)
you’d actually contribute £13,944 because you would have paid income tax on the £17430.
the SIPP provider would then add £3486 in tax relief
my SIPP provider adds it the same day

when you tell HMRC you’d say the “gross” figure is £17430
and yes they’d owe you £3486 
because you would have paid £6792 tax (on £17430) through paye and now £3486 is in your pension and £3486 is in your pocket.

the SIPP May or May not have a wider choice of investment options than the workplace pension.
it may be cheaper or more expensive.
there isn’t any set rule but sometimes companies schemes have cheaper fees due to economies of scale but we are talking a fraction 1% here and as you can see that’s nothing compared to the massive 40% win here.

You can put more or less in (up to £40k total) but you’ll only get 40% relief on the bit you’ve paid 40% tax on I.e. the £17340, the rest will be basic rate tax relief.

isayhello

lisyloo said:

£17430 is the correct figure (assuming no private medical, cars, charity contributions, wfh tax relief etc.)
you’d actually contribute £13,944 because you would have paid income tax on the £17430.
the SIPP provider would then add £3486 in tax relief
my SIPP provider adds it the same day

when you tell HMRC you’d say the “gross” figure is £17430
and yes they’d owe you £3486 
because you would have paid £6792 tax (on £17430) through paye and now £3486 is in your pension and £3486 is in your pocket.

the SIPP May or May not have a wider choice of investment options than the workplace pension.
it may be cheaper or more expensive.
there isn’t any set rule but sometimes companies schemes have cheaper fees due to economies of scale but we are talking a fraction 1% here and as you can see that’s nothing compared to the massive 40% win here.

You can put more or less in (up to £40k total) but you’ll only get 40% relief on the bit you’ve paid 40% tax on I.e. the £17340, the rest will be basic rate tax relief.

Thanks, you've explained it great, and think I finally got it. With the line in bold above, when you say the 3486 is in your pocket, do you mean after HMRC make a payment back to you?

Am I right in thinking that if I made a lump sum payment into my current workplace pension or an old workplace pension rather than a SIPP, I can still just let HMRC know and the same sums as earlier would apply?

I read on another thread that you can contribute for up to the past 3 years an allowance limit of 40k if your salary is higher, so potentially 120k. In this scenario then the SIPP/old workplace provider would add relief of 24k then but you would only get the extra relief on the 17340 for this tax year.