Two questions on SIPP contribution limits

aroominyork

Not sure if we are at cross-purposes but if I make a net SIPP contribution of £28k and tick the box (on Interactive Investor) "personal net contribution (eligible for tax relief)" they will reclaim £7k from HMRC. I will only have paid tax of (35000 - 12570) x 20% = £4486 so presumably HMRC will make an adjustment to recover £2514... but why are you saying SIPPs do not reclaim tax? Is this about the difference between reclaiming tax and tax relief?

EthicsGradient

I have been in this position; the full tax relief on the pension contributions was paid into my pension, all the Gift Aid money claimed by the charities, the gross pension contributions and charity donations added up to more than my earnings, it was all in my self assessment return, and HMRC did not say I had to pay anything to correct it (and they said my higher rate tax threshold was adjusted for both, so I know they processed the figures).

It's one time when things turn out well for a taxpayer.

Dazed_and_C0nfused

aroominyork said:

Not sure if we are at cross-purposes but if I make a net SIPP contribution of £28k and tick the box (on Interactive Investor) "personal net contribution (eligible for tax relief)" they will reclaim £7k from HMRC. I will only have paid tax of (35000 - 12570) x 20% = £4486 so presumably HMRC will make an adjustment to recover £2514... but why are you saying SIPPs do not reclaim tax? Is this about the difference between reclaiming tax and tax relief?

You are getting very confused.

Yes the pension company will claim £7k from HMRC but that has nothing to do with your personal income tax position.

If you only earned £12,000 and paid no tax you could still contribute £9,600 (net) into a relief at source pension and the pension company, courtesy of HMRC, would add £2,400 in pension tax relief making a gross contribution of £12,000 despite you paying no tax.

In your example there is no £2,514 to claim back.

aroominyork

Really helpful as ever, D&C. So I should view it as HMRC providing relief from a communal pot rather than returning the tax I have paid. Maybe that explains why EthicsGradient was allowed to make SIPP and charity payments without penalty.

EthicsGradient

One way to look at it is that withdrawals from a pension are subject to tax, so they think it's fair to pay relief on payments into it. The Gift Aid can reclaim tax that is currently being paid by the donor, and is really a separate issue (as it was for me; I paid tax on interest and/or dividend income, and it was that which the charities were allowed to reclaim). 

aroominyork

The reason I may have conflated how charity donations and SIPPs are handled is that as a higher rate taxpayer during recent years I took charity donations into account when calculating the amount I would pay into a SIPP to obtain relief on all higher rate tax. For example: £60k taxable income; 40% tax payable on £9730 = £3892. Net SIPP contributions of £7784 (£3892 x 2) are grossed to £9730 to take my tax-free allowance to £60k.

However, if I made £1000 of charity donations (before gift aid) I would only make £6784 of net SIPP contributions. Consider if I had made £7784 of charity donations on which I could claim higher rate relief - I would not obtain any additional higher rate relief by making SIPP contributions.

If that is correct, we see a divergence in how charity donations and SIPP contributions are handled for basic rate tax and for higher rate tax: basic rate relief on SIPP “has nothing to do with your personal income tax position” (D&C) while “Your (charity) donations will qualify (for gift aid) as long as they’re not more than 4 times what you have paid in tax in that tax year”. Higher rate relief is based on your personal income tax position and your 40% tax cannot be reclaimed more than once.

Dazed_and_C0nfused

aroominyork said:

The reason I may have conflated how charity donations and SIPPs are handled is that as a higher rate taxpayer during recent years I took charity donations into account when calculating the amount I would pay into a SIPP to obtain relief on all higher rate tax. For example: £60k taxable income; 40% tax payable on £9730 = £3892. Net SIPP contributions of £7784 (£3892 x 2) are grossed to £9730 to take my tax-free allowance to £60k.

However, if I made £1000 of charity donations (before gift aid) I would only make £6784 of net SIPP contributions. Consider if I had made £7784 of charity donations on which I could claim higher rate relief - I would not obtain any additional higher rate relief by making SIPP contributions.

If that is correct, we see a divergence in how charity donations and SIPP contributions are handled for basic rate tax and for higher rate tax.

Relief at source pension contributions and Gift Aid payment both work in exactly the same way for income tax purposes.

The gross contribution/payment increases your basic rate band so I'd you paid higher rate tax on £9730 that is the maximum higher rate tax relief would be due on.

The key difference between the two is there is no link between pension tax relief on relief at source pension contributions and the income tax you have personally paid.

But there is with Gift Aid.  If you haven't paid at least the amount of basic rate tax the charity claims then HMRC will ask you to pay that.

For example someone with total taxable income of say £8,000 can pay £8,000 (gross) into a relief at source pension and receive £1,600 pension tax relief but if they make a (net) Gift Aid contribution of £500 then HMRC will send them a bill for the £125 the charity claimed.

aroominyork

Dazed_and_C0nfused said:

aroominyork said:

The reason I may have conflated how charity donations and SIPPs are handled is that as a higher rate taxpayer during recent years I took charity donations into account when calculating the amount I would pay into a SIPP to obtain relief on all higher rate tax. For example: £60k taxable income; 40% tax payable on £9730 = £3892. Net SIPP contributions of £7784 (£3892 x 2) are grossed to £9730 to take my tax-free allowance to £60k.

However, if I made £1000 of charity donations (before gift aid) I would only make £6784 of net SIPP contributions. Consider if I had made £7784 of charity donations on which I could claim higher rate relief - I would not obtain any additional higher rate relief by making SIPP contributions.

If that is correct, we see a divergence in how charity donations and SIPP contributions are handled for basic rate tax and for higher rate tax.

For example someone with total taxable income of say £8,000 can pay £8,000 (gross) into a relief at source pension and receive £1,600 pension tax relief but if they make a (net) Gift Aid contribution of £500 then HMRC will send them a bill for the £125 the charity claimed.

Doesn't that conflict with EthicsGradient's experience that he received tax relief on his pension and gift aid was not reclaimed by HMRC?

EthicsGradient said:

I have been in this position; the full tax relief on the pension contributions was paid into my pension, all the Gift Aid money claimed by the charities, the gross pension contributions and charity donations added up to more than my earnings, it was all in my self assessment return, and HMRC did not say I had to pay anything to correct it (and they said my higher rate tax threshold was adjusted for both, so I know they processed the figures).

It's one time when things turn out well for a taxpayer.

masonic

aroominyork said:

Dazed_and_C0nfused said:

aroominyork said:

The reason I may have conflated how charity donations and SIPPs are handled is that as a higher rate taxpayer during recent years I took charity donations into account when calculating the amount I would pay into a SIPP to obtain relief on all higher rate tax. For example: £60k taxable income; 40% tax payable on £9730 = £3892. Net SIPP contributions of £7784 (£3892 x 2) are grossed to £9730 to take my tax-free allowance to £60k.

However, if I made £1000 of charity donations (before gift aid) I would only make £6784 of net SIPP contributions. Consider if I had made £7784 of charity donations on which I could claim higher rate relief - I would not obtain any additional higher rate relief by making SIPP contributions.

If that is correct, we see a divergence in how charity donations and SIPP contributions are handled for basic rate tax and for higher rate tax.

For example someone with total taxable income of say £8,000 can pay £8,000 (gross) into a relief at source pension and receive £1,600 pension tax relief but if they make a (net) Gift Aid contribution of £500 then HMRC will send them a bill for the £125 the charity claimed.

Doesn't that conflict with EthicsGradient's experience that he received tax relief on his pension and gift aid was not reclaimed by HMRC?

EthicsGradient said:

I have been in this position; the full tax relief on the pension contributions was paid into my pension, all the Gift Aid money claimed by the charities, the gross pension contributions and charity donations added up to more than my earnings, it was all in my self assessment return, and HMRC did not say I had to pay anything to correct it (and they said my higher rate tax threshold was adjusted for both, so I know they processed the figures).

It's one time when things turn out well for a taxpayer.

No, it doesn't. Dazed_and_C0nfused used an example where an individual paid no tax on their income. This means they are ineligible for any tax relief on Gift Aid. Whether they put money into a pension or not is irrelevant to the tax they paid on their income. EthicsGradient did not state it explicitly, but I think we can assume (and perhaps he could confirm) the amount donated to charity was less than 4 times the tax he paid on his income.

Dazed_and_C0nfused

masonic said:

aroominyork said:

Dazed_and_C0nfused said:

aroominyork said:

The reason I may have conflated how charity donations and SIPPs are handled is that as a higher rate taxpayer during recent years I took charity donations into account when calculating the amount I would pay into a SIPP to obtain relief on all higher rate tax. For example: £60k taxable income; 40% tax payable on £9730 = £3892. Net SIPP contributions of £7784 (£3892 x 2) are grossed to £9730 to take my tax-free allowance to £60k.

However, if I made £1000 of charity donations (before gift aid) I would only make £6784 of net SIPP contributions. Consider if I had made £7784 of charity donations on which I could claim higher rate relief - I would not obtain any additional higher rate relief by making SIPP contributions.

If that is correct, we see a divergence in how charity donations and SIPP contributions are handled for basic rate tax and for higher rate tax.

For example someone with total taxable income of say £8,000 can pay £8,000 (gross) into a relief at source pension and receive £1,600 pension tax relief but if they make a (net) Gift Aid contribution of £500 then HMRC will send them a bill for the £125 the charity claimed.

Doesn't that conflict with EthicsGradient's experience that he received tax relief on his pension and gift aid was not reclaimed by HMRC?

EthicsGradient said:

I have been in this position; the full tax relief on the pension contributions was paid into my pension, all the Gift Aid money claimed by the charities, the gross pension contributions and charity donations added up to more than my earnings, it was all in my self assessment return, and HMRC did not say I had to pay anything to correct it (and they said my higher rate tax threshold was adjusted for both, so I know they processed the figures).

It's one time when things turn out well for a taxpayer.

No, it doesn't. Dazed_and_C0nfused used an example where an individual paid no tax on their income. This means they are ineligible for any tax relief on Gift Aid. Whether they put money into a pension or not is irrelevant to the tax they paid on their income. EthicsGradient did not state it explicitly, but I think we can assume (and perhaps he could confirm) the amount donated to charity was less than 4 times the tax he paid on his income.

Couldn't have said it better myself 😊