Defer state pension?

aroominyork

Thanks, Dazed. To confirm... if OH is a higher rate taxpayer from her employment, does she pay £800 net into SIPP for each £1000 of untaxed SP that she receives, in order to reclaim higher rate tax on her SP? Bottom line is £600 in SIPP and £400 in pocket.

Dazed_and_C0nfused

In theory yes.

She won't have £800 net to pay in so will need to fund some of the pension contribution from other sources/savings but a contribution of £800 net becomes a gross contribution of £1,000 with the basic rate pension tax relief.

That then increases her basic rate band by £1,000 so an extra £1,000 of her income can be taxed at 20% rather than being taxed at 40%.

So in a very simplistic scenario where she is well over the higher rate threshold the extra £1,000 on her basic rate band saves her £200 (20% tax paid instead of 40%).

But just being a higher rate payer doesn't mean she gets an extra 20% back.  She needs to be paying enough higher rate tax.

If she was only liable to higher rate tax on say £400 then the gross contribution of £1,000 would only produce a personal tax saving of £80, not £200.

Dazed_and_C0nfused

Bottom line is £600 in SIPP and £400 in pocket.

Don't know what you mean by this?

If she wants to increase her basic rate band by £1,000 she will need to hand over £800 to the pension company.  Which will become a gross contribution £1,000 in her pension fund.

Nothing else will be added or deducted from the pension fund in relation to this contribution or any personal tax saving.

aroominyork

Dazed_and_C0nfused said:

Bottom line is £600 in SIPP and £400 in pocket.

Don't know what you mean by this?

If she wants to increase her basic rate band by £1,000 she will need to hand over £800 to the pension company.  Which will become a gross contribution £1,000 in her pension fund.

Nothing else will be added or deducted from the pension fund in relation to this contribution or any personal tax saving.

Sorry, I occasionally confuse myself - as well as others - on SIPPs and tax. So is this correct:

- for each £1000 of gross SP, pay £800 into SIPP

- SIPP is grossed up to £1000

- on self-assessment, reclaim £200 (20% of £1000 gross paid into SIPP)

- end result: £1000 in SIPP (nothing 'in pocket').

Dazed_and_C0nfused said:

She won't have £800 net to pay in so will need to fund some of the pension contribution from other sources/savings...

Which is because under PAYE "If you continue to work: Your employer will take any tax due off your earnings and your State Pension". See https://www.gov.uk/tax-on-pension/how-your-tax-is-paid. So £1000 gross SP, £600 received after PAYE, contribute £800 net into SIPP, reclaim £200 on self-assessment - is that correct?

And that other source can be the increase in net salary since NICs will no longer be deducted.

zagfles

She might not need to do a tax return, if she doesn't already. Just let HMRC know about the SIPP contributions and they should be able to sort it through the tax code.

The state pension amount would usually reduce the employment income tax code, so eg 1257L is reduced to 557L if the pension is £7k. So that means £7k extra is taxed in the employment income.

If she makes SIPP contributions and is a higher rate taxpayer, the tax code is usually increased by half the gross contribution to give the extra relief. So if £7k gross SIPP cont, increased from 557L to 907L. So £3500 less is taxed at 40%, equivalent to £7000 less being taxed at 20%.

Then she'd need to pay £5600 net into the SIPP, so then she has effectively paid her state pension into the SIPP and her take home pay will be the same. She'll pay tax on an extra £3500, at 40% = £1400. She's pay £5600 of the £7000 SP into the SIPP, leaving £1400 which makes up for the extra tax she'll be paying. 

Ignoring the NI saving once over SPA, but she'll still have to pay the new 1.25% levy (currently part of NI but separated out next year) as that will apply to people over SPA.

 

 

aroominyork

Thanks zag. I have difficulty understanding amended tax codes. The way I work it out - which has the same outcome - is that the extra SIPP contributions should be double the 40% tax paid, so... 40% tax on £7000 gross is £2800, so pay double that - £5600 - into SIPP.

Thanks for pointing out that the 1.25% applies to post-retirement age people. I thought it was a first step towards unifying tax and NI - not to creating a third level!

nigelbb

She can keep the SIPP in cash & just use it to wash away tax by taking 25% tax free & taking the rest when she actually retires & possibly is not paying higher rate tax.

aroominyork

nigelbb said:

She can keep the SIPP in cash & just use it to wash away tax by taking 25% tax free & taking the rest when she actually retires & possibly is not paying higher rate tax.

While she/we are working and especially while we are higher rate taxpayers, we will want to pay into a SIPP. Once we start drawing from it we lose that option.

Dazed_and_C0nfused

aroominyork said:

nigelbb said:

She can keep the SIPP in cash & just use it to wash away tax by taking 25% tax free & taking the rest when she actually retires & possibly is not paying higher rate tax.

While she/we are working and especially while we are higher rate taxpayers, we will want to pay into a SIPP. Once we start drawing from it we lose that option.

Not at all, you are simply restricted by the MPAA.  And that's only of you flexibly access taxable income.  If you buy an annuity (probably unlikely at the moment) or just take a TFLS there will be no extra restrictions.

zagfles

Dazed_and_C0nfused said:

aroominyork said:

nigelbb said:

She can keep the SIPP in cash & just use it to wash away tax by taking 25% tax free & taking the rest when she actually retires & possibly is not paying higher rate tax.

While she/we are working and especially while we are higher rate taxpayers, we will want to pay into a SIPP. Once we start drawing from it we lose that option.

Not at all, you are simply restricted by the MPAA.  And that's only of you flexibly access taxable income.  If you buy an annuity (probably unlikely at the moment) or just take a TFLS there will be no extra restrictions.

Except need to watch out for recycling rules, if pension contributions increase significantly after taking a TFLS.