Additional contributions to SIPP

DanJ90

Hi all,

I hope everybody has had a good weekend!

Im just looking for a sanity check more than anything else as I haven’t been in this position before..

I am in a position at work where I am in receipt of an annual bonus that I would like to put Into my pension fund, but I am unable to do so via my workplace pension (Salary sacrifice).

So In order to do this presumably I will need to contribute to my external SIPP once it has been paid. I am a HRT also, so I am looking at claiming back the full 40% tax relief, as the bonus will push me over the 50K mark once I receive it.

My questions are as follows:

1) In order to get myself back into the standard tax bracket, how do I work out the number I’ll need to contribute into the SIPP so that I contribute exactly the bonus amount only? Is it a case of *bonus* x 0.60, and then I get the 0.40 back in tax relief into the SIPP?

2) I understand the SIPP provider claims back the 20% relief, but how do I go about claiming the higher rate relief?

Thanks!

Brie

I don't know why you can't put this into your workplace pension.  Many, particularly if you are with a larger employer, will have a way for the money to go directly into your OPS as an additional voluntary contribution (AVC).   No idea how that will work for tax purposes though. 

Dazed_and_C0nfused

You've a few misunderstandings there.

Firstly if you contribute to a SIPP it will be under the relief at source method which means the pension company will add basic rate tax relief, courtesy of HMRC.  

For example if you pay £5,000 they will add £1,250 (25%) making a gross contribution of £6,250.  £1,250 is 20% of the gross amount.

There is no fixed extra 20%, any additional tax relief due (which always saves you money, it's never added to the pension) is dependent on your overall tax position for the year.

So you need to estimate how much of your taxable income will normally be taxed at 40% and then contribute 80% of that.

They gross contribution increases your basic rate band meaning more income is taxed at 20% and less at 40%.

But if you would only pay 40% on say £500 the maximum higher rate tax relief would normally be £100 (£500 taxed at 20% instead of 40%). 

There can be other elements which increase your personal tax saving, for example retention of Marriage Allowance, £1,000 savings nil rate band (aka Personal Savings Allowance) or reduction/removal of any HICBC.

Do you normally complete a Self Assessment return?

EdSwippet

DanJ90 said:

I am in a position at work where I am in receipt of an annual bonus that I would like to put Into my pension fund, but I am unable to do so via my workplace pension (Salary sacrifice).

Where available, salary sacrifice almost always beats individual pension contributions.

If your employer really won't offer "bonus sacrifice", have you considered instead simply bumping up your monthly salary sacrifice for the remainder of the tax year, to produce the same effect? Money is fungible. Rather than pay bills with salary and place bonus into the pension, can you instead pay bills with bonus and place salary (sacrifice) into the pension?

sheslookinhot

It will depend on how much of the bonus is over £50,270. Only the bonus over this amount is subject to extra relief.

DanJ90

Thanks for the reply all.

To confirm I’m understanding correctly.. let’s say the 5K figure.. I would need to contribute £3000 to the SIPP (which I assume would be the amount that get in my net pay as I am very much in the middle of the 40% tax banding so the entire bonus will be at 40%) then I should receive the following:

1) 20% back via the SIPP provider 
2) claim the other 20% via the self assessment form at the end of the tax year?

This should then equal the bonus given before any deductions (maybe minus the NI accrued on the bonus)?

I’ve never done a self assessment form so would need to look into that.

The bonus paying the bills is an interesting idea for sure.. I’d need to do some sums to work this out.. Only issue I can only change my contributions once a year in September.

Dazed_and_C0nfused

DanJ90 said:

Thanks for the reply all.

To confirm I’m understanding correctly.. let’s say the 5K figure.. I would need to contribute £3000 to the SIPP (which I assume would be the amount that get in my net pay as I am very much in the middle of the 40% tax banding so the entire bonus will be at 40%) then I should receive the following:

1) 20% back via the SIPP provider 
2) claim the other 20% via the self assessment form at the end of the tax year?

This should then equal the bonus given before any deductions (maybe minus the NI accrued on the bonus)?

I’ve never done a self assessment form so would need to look into that.

The bonus paying the bills is an interesting idea for sure.. I’d need to do some sums to work this out.. Only issue I can only change my contributions once a year in September.

These is usually no need to complete a Self Assessment return just to claim tax relief on pension contributions.

If you contributed £3,000 then the gross contribution would be £3,750.

That doesn't sound like what you intend.  If you want £5,000 in your pension fund then you need to pay £4,000 to the pension company.

zagfles

EdSwippet said:

DanJ90 said:

I am in a position at work where I am in receipt of an annual bonus that I would like to put Into my pension fund, but I am unable to do so via my workplace pension (Salary sacrifice).

Where available, salary sacrifice almost always beats individual pension contributions.

If your employer really won't offer "bonus sacrifice", have you considered instead simply bumping up your monthly salary sacrifice for the remainder of the tax year, to produce the same effect? Money is fungible. Rather than pay bills with salary and place bonus into the pension, can you instead pay bills with bonus and place salary (sacrifice) into the pension?

Yes this is a particularly good idea if your normal salary is around the HRT threshold and the bonus takes you over.

If you put the bonus into a SIPP you'd only get 40% tax relief. If you sal sac it into the pension, you only get 43.25% tax and NI relief. But if you instead take the bonus as pay and increase sal sac on normal salary over the rest of the year, you'd get 53.25% relief on most of it, as you'd be mostly sal sac'ing in the normal NI 13.25% band not the 3.25% above UEL band.

This is because NI works on a pay period basis whereas tax works on annual income.