Two questions on SIPP contribution limits

EthicsGradient

As I did say in a later post, " I paid tax on interest and/or dividend income, and it was that which the charities were allowed to reclaim" - yes, my Gift Aid contributions were under 4 times the total income tax I paid, although the gross amount and the gross amount paid into the SIPP added up to more than my earned income.

Maybe the way to look at it is just to think what the limit is on pension contributions that attract relief. It's at least £3,600 (gross) for everyone, your earned income for anyone earning more than that, and a maximum of £40,000. It's not set by the tax you pay.

zagfles

EthicsGradient said:

As I did say in a later post, " I paid tax on interest and/or dividend income, and it was that which the charities were allowed to reclaim" - yes, my Gift Aid contributions were under 4 times the total income tax I paid, although the gross amount and the gross amount paid into the SIPP added up to more than my earned income.

Maybe the way to look at it is just to think what the limit is on pension contributions that attract relief. It's at least £3,600 (gross) for everyone, your earned income for anyone earning more than that, and a maximum of £40,000. It's not set by the tax you pay.

That part is incorrect. I know it's meant as an approximation, but it's a dangerous one that causes utter confusion as we see on the pensions board all the time.

The tax relief limit is £3600 or 100% of earnings if higher.

The annual allowance is a separate limit which includes employer contributions or increase in DB value, allows carry forwards etc. It measures a different thing, and has different rules. The consequences of exceeding it are different too.

aroominyork

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.

I think I see... 'taxable income' of £8000 can refer to a salary of £8000. I took it to mean £8000 taxed at 20%, ie a salary of £20,570.

But I think you have confirmed that when calculating SIPP contributions to obtain maximum higher rate relief, you have to adjust downwards to reflect any charity donations, yes?

masonic

aroominyork said:

But I think you have confirmed that when calculating SIPP contributions to obtain maximum higher rate relief, you have to adjust downwards to reflect any charity donations, yes?

Your SIPP contributions will increase your basic rate band. That will affect how much, if anything, you can claim back in higher rate tax relief on your donations. If you intend to use SIPP contributions to remove your higher rate tax liability, then your chosen charities will be able to claim Gift Aid, but you won't be able to claim anything further.

zagfles

masonic said:

aroominyork said:

But I think you have confirmed that when calculating SIPP contributions to obtain maximum higher rate relief, you have to adjust downwards to reflect any charity donations, yes?

Your SIPP contributions will increase your basic rate band. That will affect how much, if anything, you can claim back in higher rate tax relief on your donations. If you intend to use SIPP contributions to remove your higher rate tax liability, then your chosen charities will be able to claim Gift Aid, but you won't be able to claim anything further.

Alternatively you could look at the other way round, and say that as Gift Aid increases the BR band, then the SIPP contribution to remove higher rate liability should be correspondingly less.

For instance if your income is £10k above the HR threshold and Gift Aid is £800 (ie £1000 gross), then you should contribute £9k gross (£7200 net) to the SIPP to remove HR liability

masonic

zagfles said:

masonic said:

aroominyork said:

But I think you have confirmed that when calculating SIPP contributions to obtain maximum higher rate relief, you have to adjust downwards to reflect any charity donations, yes?

Your SIPP contributions will increase your basic rate band. That will affect how much, if anything, you can claim back in higher rate tax relief on your donations. If you intend to use SIPP contributions to remove your higher rate tax liability, then your chosen charities will be able to claim Gift Aid, but you won't be able to claim anything further.

Alternatively you could look at the other way round, and say that as Gift Aid increases the BR band, then the SIPP contribution to remove higher rate liability should be correspondingly less.

For instance if your income is £10k above the HR threshold and Gift Aid is £800 (ie £1000 gross), then you should contribute £9k gross (£7200 net) to the SIPP to remove HR liability

Yes, quite right, if you want to minimise your SIPP contribution to only that which is necessary to remove you from HRT, then that would be the way to calculate it to make the most of both reliefs.