SIPP and higher rate tax relief process

lisyloo

Yes I mean the £3486 comes back to you from HMRC (as opposed to going into your pension).

If you put it into the employers pension it depends on how they do it.
if they do “net pay” I.e. pay the pension BEFORE taxing you then you shouldn’t need to do anything. (I am assuming a lump sum at the end of the year would result in a tax refund via PAYE).
if they do “relief at source” I.e. pay the pension AFTER taxing you then You’ll need to claim the higher rate tax relief back. This is because pension schemes don’t know everyone’s tax rate so just do basic rate.

you can either ask your payroll department which they do or work it out from your payslips.

So for example if your payslips say your paying £80 into your pension and £100 is arriving then your company are taxing you and the pension scheme is adding the relief which is “relief at source”.
if you have £100 employee contribution on your payslip and £100 in your pension then that is “net pay”.

from the 120k limit you’d need to deduct any workplace contributions you’d already made over the last 3 years 

it’s not 120k plus tax relief (£24k)
its 120k Gross (including tax) which is somewhere between £72k and £96k net of tax (because some of it is at 20% and some of it is at 40%)
You should be able to add up your pension contributions either from an online pension scheme interface, pension statements or payslips.

so gross means it’s the amount received into your pension WITH tax relief and it’s £120k gross total.

isayhello

lisyloo said:

from the 120k limit you’d need to deduct any workplace contributions you’d already made over the last 3 years 

it’s not 120k plus tax relief (£24k)
its 120k Gross (including tax) which is somewhere between £72k and £96k net of tax (because some of it is at 20% and some of it is at 40%)
You should be able to add up your pension contributions either from an online pension scheme interface, pension statements or payslips.

so gross means it’s the amount received into your pension WITH tax relief and it’s £120k gross total.

Thanks, so a 96k contribution into a SIPP would cover you for the past 3 years and be topped at BR to 120k.
So in reality, 96k - any contributions that were already made over the past 3 years?

There was a period of a few months where I wasn't working in the past 3 years, does this reduce the limit of 40k per year?

Then contact HMRC and recover the 20% tax relief on however much was being earned over the BR amount for the past 3 years?

isayhello

lisyloo said:

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

This made me wonder, if you're a higher rate payer and you're in a relief at source setup, is your yearly salary broken down into 12 months with a BR and higher rate threshold per month, so the amount that you earn for that month will be taxed in different tiers. I guess the idea is that if your salary is the same each month then it should work out over the year, or if you earn more in 1 month then you'd pay more and vice versa?

lisyloo

isayhello said:

lisyloo said:

from the 120k limit you’d need to deduct any workplace contributions you’d already made over the last 3 years 

it’s not 120k plus tax relief (£24k)
its 120k Gross (including tax) which is somewhere between £72k and £96k net of tax (because some of it is at 20% and some of it is at 40%)
You should be able to add up your pension contributions either from an online pension scheme interface, pension statements or payslips.

so gross means it’s the amount received into your pension WITH tax relief and it’s £120k gross total.

Thanks, so a 96k contribution into a SIPP would cover you for the past 3 years and be topped at BR to 120k.
So in reality, 96k - any contributions that were already made over the past 3 years?

There was a period of a few months where I wasn't working in the past 3 years, does this reduce the limit of 40k per year?

Then contact HMRC and recover the 20% tax relief on however much was being earned over the BR amount for the past 3 years?

I’ve checked and it’s the 3 previous tax years in addition to this tax year, so
2018/2019
2019/2020
2020/2021
2021/2022 <- this tax year

so its max £160 gross.

however whilst the annual allowance is 4 years,
the tax relief only applies to the current year 2021/2022
And remember you’ve only paid tax on 55,130
personally I would not contribute more than 55130

The tax relief applies to the tax year the contribution was made in.

bugbyte_2

A couple of years ago I set up a SIPP with Close Bros. Close Bros claim an additional 20% on my behalf. The 'next' 20% to make up the 40% tax back I had to claim from HMRC, which I did by writing the letter below (wouldn't accept an email 2 years ago don't know about now!):

Pay As You Earn
HM Revenue and Customs
BX9 1AS

Dear Sir / Madam,

 

CLAIM FOR TAX RELIEF AT HIGHER RATE ON SIPP

I have been advised by your online chat facility that I need to write to you to request a claim for higher rate 40% tax relief on my SIPP. My details are:

Name: xxxxxxx

Address: xxxxxxx

Date of Birth: xxxxxxx

National Insurance Number: xxxxxxx

Tax Code: 1250L

Current Employer: xxxxxxx

Total Gross Pay pa: £xxxxx

Total work based Pension Contributions pa: £xxxxxxx

No other taxable income.

No contribution to SIPP’s or any other scheme which can claim tax relief in past three years.

SIPP Provider: xxxxxxxxxxxx

Account Number: xxxxxxxx

SIPP contact details: xxxxxxxxxx

 

HMRC then changed my tax code so my personal allowance has increased giving me the equivalent amount of 20% in the course of a year.

i.e. Pay in £10,000, SIPP provider adds 20% = £10,000 + £2,000 = £12,000, tax code changes to 1350L which gives you over the course of a year an additional £2000 in your pay packet.

However.....

You can only claim 40% on earnings above £50,271 + any work based pension contributions. Say you earned £70,000 and paid in £10,000 into a work based pension. You can only claim 40% on contributions up to £70,000 - £50,271 - £10,000 = £9,729. 

But......

If you haven't contributed to a SIPP in the past three years you can use those years tax allowance as well.

Hope this helps!

lisyloo

isayhello said:

lisyloo said:

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

This made me wonder, if you're a higher rate payer and you're in a relief at source setup, is your yearly salary broken down into 12 months with a BR and higher rate threshold per month, so the amount that you earn for that month will be taxed in different tiers. I guess the idea is that if your salary is the same each month then it should work out over the year, or if you earn more in 1 month then you'd pay more and vice versa?

Yes, the paye system adjusts as it goes along.
so in month 1, they assume you earn 12 times that amount.
in month 6, they assume you’ll earn double what you’ve already been paid.
this means you can temporarily overpay when you get a bonus or overtime, but it all works out in the end correctly at month 12.
if you overpaid because you got a bonus, then you’d underpay in subsequent months when your salary was lower than the bonus month,
there is no need to worry about paye
its only the pension schemes that cannot adjust to different tax rates as they won’t know what every member is earning.

isayhello

lisyloo said:

I’ve checked and it’s the 3 previous tax years in addition to this tax year, so
2018/2019
2019/2020
2020/2021
2021/2022 <- this tax year

so its max £160 gross.

however whilst the annual allowance is 4 years,
the tax relief only applies to the current year 2021/2022
And remember you’ve only paid tax on 55,130
personally I would not contribute more than 55130

The tax relief applies to the tax year the contribution was made in.

Thanks, I always find using an example helps me explain 

So based on above, I could contribute 128k - whatever contributions I've made for this year and the past 3 years, this would be grossed up to 160k by the SIPP provider? and the only higher rate tax relief I would get would be for this year on 55,130-37,700?

Why would you not contribute more than 55,130 if you could by the way? are you not losing out on the BR tax relief?

jamei305

One reason to start a SIPP in addition to an employer pension is to avoid putting all your eggs in one basket. Your employer scheme will have trustees and rules (which can be amended at any time) which may limit investment choices and retirement options, but a SIPP is entirely under your control.

lisyloo

isayhello said:

lisyloo said:

I’ve checked and it’s the 3 previous tax years in addition to this tax year, so
2018/2019
2019/2020
2020/2021
2021/2022 <- this tax year

so its max £160 gross.

however whilst the annual allowance is 4 years,
the tax relief only applies to the current year 2021/2022
And remember you’ve only paid tax on 55,130
personally I would not contribute more than 55130

The tax relief applies to the tax year the contribution was made in.

Thanks, I always find using an example helps me explain 

So based on above, I could contribute 128k - whatever contributions I've made for this year and the past 3 years, this would be grossed up to 160k by the SIPP provider? and the only higher rate tax relief I would get would be for this year on 55,130-37,700?

Why would you not contribute more than 55,130 if you could by the way? are you not losing out on the BR tax relief?

No I don’t think that’s right.
the annual allowance goes back 4 years
However if you make a contribution now (before 5/4) then the tax relief is limited to THIS tax year only.

so what’s the point of carry over?
well it means you can put in 55130, not be limited at 40,000

there would be no tax relief beyond 55130 as you paid 0% on 12570.
you can put in more but there’s no advantage and significant disadvantages.
Personally I’d put any extra in an ISA as that is available before 55 and is not subject to income tax on withdrawal.

you can make a backdated claim for previous years if you made contributions in those tax years and didn’t claim the higher rate relief, but the relief applies to the year (April -> April) in which you made the contributions.

Dazed_and_C0nfused

Then contact HMRC and recover the 20% tax relief on however much was being earned over the BR amount for the past 3 years?

No.  You can only ever get pension tax relief or higher rate tax relief for the tax year the contribution was made in.  

What your tax position was in the previous 3 tax years has no relevance to the tax relief at all as you can never get tax relief for an earlier tax year to the one the contribution was paid in.