Two questions on SIPP contribution limits

aroominyork

Two questions on SIPP contribution limits, please.

1)      Do salaried and self-employed incomes both count towards the salary cap? Example: £30k salary/PAYE + £5k side gig declared on self-assessment. Can net contributions be made of £28,800, on which the platform would reclaim £7200 tax?

2)      Must gift aided charity contributions be deducted from net contributions on which tax can be reclaimed at source? Example: £35k salary cap. £2k gift aided net charity contributions. Can SIPP net contributions only be made up to 35000 - (2000/0.8) = 32500, hence £26000 net SIPP contributions on which the platform would reclaim £6500 tax? If so, can an additional gross SIPP contribution of £2500 be made – on which no tax is reclaimed – to make use of the full salary cap?

Linton

1) Yes, with a gross income of £35K you can contribute a total of £35K gross into your pensions, both employer and private.  If you were paying with taxed money that would represent an actual payment of £28000 and HMRC would repay £7K into your pensions.  Your arithmetic wrong but in principle you are right. 

2) I have never seen this explicitly stated but nothing I have seen says otherwise so  that even if you pay charity contributions the figures remain the same as in (1).   You can pay more than your earnings into pensions in any one tax year but you do not get tax relief on the excess.   How this is handled administratively I dont know.  SInce you will probably be taxed on withdrawal it does not seem to be a benefical strategy.

aroominyork

Thanks, Linton. Don't know how I got 35 x 0.8 not to equal 28!

On the second point, you are saying that any tax reclaimed under gift aid does not reduce the amount that can be reclaimed at source through a SIPP? But wouldn't that mean the same tax is reclaimed twice?

Re whether it would be beneficial to pay in amounts that do not get tax relief, you are of course right: if no basic rate tax is reclaimed on the SIPP I would end up worse off after pension withdrawals are taxed.

masonic

aroominyork said:

On the second point, you are saying that any tax reclaimed under gift aid does not reduce the amount that can be reclaimed at source through a SIPP? But wouldn't that mean the same tax is reclaimed twice?

Yes, it would mean that, but there doesn't seem to be anything restricting this. See for example: https://www.gov.uk/donating-to-charity/gift-aid
"Paying enough tax to qualify for Gift Aid
Your donations will qualify as long as they’re not more than 4 times what you have paid in tax in that tax year (6 April to 5 April).
The tax could have been paid on income or capital gains.

You must tell the charities you support if you stop paying enough tax."

The situation where you have received other tax reliefs is not even mentioned.

Linton

aroominyork said:

Thanks, Linton. Don't know how I got 35 x 0.8 not to equal 28!

On the second point, do you agree that any tax reclaimed under gift aid reduces the amount that can be reclaimed at source through a SIPP? Re whether it would be beneficial, you are of course right: if no basic rate tax is reclaimed on the SIPP I would end up worse off.

I do not agree that gift aid reduces your entitlement to 20% basic rate tax relief on a private pension contribution.   All the documentation I have seen refers to the limit being on your gross earnings.  The basic rate tax relief is always at 20% of your gross contribution.  

zagfles

1) Yes except your figures are wrong, it'd be £28,000 & £7,000. Also assuming the £5k SE is after expenses/trading allowance taken off, ie the taxable profit. And the PAYE income is the taxable P60 income rather than salary (ie after any workplace employee pension conts taken off). Or if the workplace pension uses RAS then consider these lumped together with the SIPP conts - eg £35k salary, £2k gross to workplace RAS scheme, leaves £33k gross available for SIPP.

2) I don't think gift aid would affect anything, as gift aid doesn't reduce taxable income. The more important question is whether you'd still be allowed to gift aid, as your overall tax would be negative (tax paid minus tax relief in the SIPP) and the condition for gift aid is that you pay at least the amount of tax the charity is reclaiming. But I don't think the tax relief in the SIPP would count. But you probably need to look into this more.

Your last sentence misunderstands the "salary cap". It's not a cap on contributions, it's a cap on tax relief. You can put as much as you like into the pension, the 100% of salary limit is a limit on tax relief. So theoretically you could put whatever you want in if you don't want tax relief. Obviously there's the annual allowance as well which could make large contribution very tax inefficient, but not illegal. However, most providers don't accept contributions on that basis.

See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100

aroominyork

zagfles said:

2) I don't think gift aid would affect anything, as gift aid doesn't reduce taxable income. The more important question is whether you'd still be allowed to gift aid, as your overall tax would be negative (tax paid minus tax relief in the SIPP) and the condition for gift aid is that you pay at least the amount of tax the charity is reclaiming. But I don't think the tax relief in the SIPP would count. But you probably need to look into this more.

masonic said:

aroominyork said:

On the second point, you are saying that any tax reclaimed under gift aid does not reduce the amount that can be reclaimed at source through a SIPP? But wouldn't that mean the same tax is reclaimed twice?

"Paying enough tax to qualify for Gift Aid
Your donations will qualify as long as they’re not more than 4 times what you have paid in tax in that tax year (6 April to 5 April).
The tax could have been paid on income or capital gains.

You must tell the charities you support if you stop paying enough tax."

So if make SIPP contributions that reclaim tax at source and raise my personal allowance to more than my salary, and then make charity donations, I seem to have breached the gift aid statement I signed. What would HMRC do? Obviously not go to the charity (it's 99.9% certain that only through self-assessment do HMRC know about my donations) so presumably they would post a debit against my tax account. What do you all think?

Dazed_and_C0nfused

You cannot ever increase your Personal Allowance above £12,570.

There is no direct link between pension tax relief given under the relief at source system and your own personal income tax liability.

If there was then non taxpayers couldn't get the free £2,514/year that some no doubt get.  Or the £720 that the masses get.

If your taxable income is £35k and you contribute £35k (gross) to a relief at source pension scheme it's almost certainly not going to save you a penny in income tax.  You will still be paying about £4.5k.  Are you paying more than £22k in (gross) Gift Aid contributions?

masonic

aroominyork said:

zagfles said:

2) I don't think gift aid would affect anything, as gift aid doesn't reduce taxable income. The more important question is whether you'd still be allowed to gift aid, as your overall tax would be negative (tax paid minus tax relief in the SIPP) and the condition for gift aid is that you pay at least the amount of tax the charity is reclaiming. But I don't think the tax relief in the SIPP would count. But you probably need to look into this more.

masonic said:

aroominyork said:

On the second point, you are saying that any tax reclaimed under gift aid does not reduce the amount that can be reclaimed at source through a SIPP? But wouldn't that mean the same tax is reclaimed twice?

"Paying enough tax to qualify for Gift Aid
Your donations will qualify as long as they’re not more than 4 times what you have paid in tax in that tax year (6 April to 5 April).
The tax could have been paid on income or capital gains.

You must tell the charities you support if you stop paying enough tax."

So if make SIPP contributions that reclaim tax at source and raise my personal allowance to more than my salary, and then make charity donations, I seem to have breached the gift aid statement I signed. What would HMRC do? Obviously not go to the charity (it's 99.9% certain that only through self-assessment do HMRC know about my donations) so presumably they would post a debit against my tax account. What do you all think?

Which part of the gift aid statement you signed do you believe you will breach?

aroominyork

Thanks, D&C. I meant tax-free allowance, not personal allowance.

These are not exact figures and my earnings this year are uncertain. At the moment I am just interested in the principle of how gift aid and SIPPs are treated if they appear to reclaim the same tax.

Dazed_and_C0nfused

I suspect where you're going wrong is thinking SIPPs reclaim (your) tax.  They don't.

As said previously if you contribute £35k (gross) when earning £35k it won't, unless maybe you're Scottish resident for tax purposes, reduce the income tax you pay. 

You will still be paying c£4.5k.