ISA or SIPP

AskAsk

What are people's views on ISA vs SIPP for basic rate tax payers? 

I would still think that the SIPP is the better platform for investment if you don't need to access the money until your retirement but my husband thinks for a basic rate tax payer, there is little advantage in the SIPP over the ISA.

Albermarle

For a basic rate taxpayer the minimum tax advantage of a pension over and ISA is 6.25% .
£100 in pension costs £80 . From the £100 you get £25 tax free and £75 taxed at 20% = £60.
So in total you get £85 back from £80.

This is a minimum . If you pay workplace pension contributions by salary sacrifice you make some NI gains. If you can get some of the taxable income out without paying tax as it is under your personal allowance then you gain more .

As far as investments are concerned there is no difference . The same investment in either will perform the same .
It is simply  case of better tax treatment vs accessibility before your mid to late Fifties.

AskAsk

Albermarle said:

For a basic rate taxpayer the minimum tax advantage of a pension over and ISA is 6.25% .
£100 in pension costs £80 . From the £100 you get £25 tax free and £75 taxed at 20% = £60.
So in total you get £85 back from £80.

This is a minimum . If you pay workplace pension contributions by salary sacrifice you make some NI gains. If you can get some of the taxable income out without paying tax as it is under your personal allowance then you gain more .

As far as investments are concerned there is no difference . The same investment in either will perform the same .
It is simply  case of better tax treatment vs accessibility before your mid to late Fifties.

6.25% is still worth having if you don't need the money until retirement in my opinion.  also you don't have to pay the 20% tax until retirement, so in the mean time you get that money, which is effectively the tax man's money, to invest and make profit.

dunstonh

What are people's views on ISA vs SIPP for basic rate tax payers? 

Depends on which ISA.   However, the position hasn't changed since 2015.

I would still think that the SIPP is the better platform for investment if you don't need to access the money until your retirement but my husband thinks for a basic rate tax payer, there is little advantage in the SIPP over the ISA.

1-0 to you in most scenarios.   Basic rate relief with full amount taxed at basic rate on withdrawal still puts the pension better than ISA as long as you can wait until the retirement age range.

ColdIron

Are you or your husband likely to become a higher rate taxpayer before you need access to the SIPP?

george4064

ColdIron said:

Are you or your husband likely to become a higher rate taxpayer before you need access to the SIPP?

I’m interested to know what you’re going to say next after this.

Currently my OH and I are earning just below the HR threshold respectively, so I’m thinking it’s best to hold off on extra pension contributions (above and beyond getting the best employer matching) and contribute to ISAs instead. 

Hoping that in the future we’ll both have HR earnings we can sal sac into our pensions for higher tax relief than what we’d get now.

Have I understood it correctly? And is there a better way we could go about things?

ColdIron

Pensions beat ISAs for HR tax payers. Rather than making extra SIPP contributions today you could put them in an ISA and use them to fund higher SIPP payments after one or both of you crosses the threshold. You could do this indirectly by using the ISA to supplement living expenses (or large purchases) allowing you to make higher sal sac contributions and make the most of the tax relief and NI benefits

Have I understood it correctly?

I think so, essentially you are deferring your contributions