How much tax do I need to pay

Dazed_and_C0nfused

sultan123 said:

Dazed_and_C0nfused said:

No.  But it has other advantages.

Your taxable income would remain £100k but your basic rate band would be increased by £6,000* meaning more tax paid at 20% and less at 40%.

And your Personal Allowance is based on adjusted net income not taxable income and that type of pension contribution (relief at source) do reduce your adjusted net income.

So say your adjusted net income was going to be £106,000. That would mean your Personal Allowance would be reduced by £3,000 from £12,570 to £9,570.

But if you contributed £6,000 to a relief at source pension such as a SIPP then your adjusted net income would be £100,00 and you would retain your full Personal Allowance.

Pension contributions are very tax efficient is this type of situation.

You hand over £4,800 and the pension company adds £1,200 in basic rate tax relief giving you a pension fund of £6,000 and

You get to retain your full Personal Allowance and

Your basic rate band is increased by £6,000.

*All of the above assumes a gross contribution of £6,000, not a net contribution of £6,000

Thank you that is so helpful. What do you mean by gross and net though. I would take 6k from my income post tax and NI and put that amount into a SIPP

Gross is the total contribution including basic rate tax relief.  With personal contributions into a SIPP the pension company will add basic rate tax relief.  So if you pay £6,000 of your own money then £1,500 is added in basic rate tax relief making a gross contribution of £7,500.

Dazed_and_C0nfused

sultan123 said:

Also why would basic rate band be increased due to SIPP contribution

That's just how they work.  Some pension contributions such as net pay ones reduce your income for tax purposes i.e. salary £90k with 10% net pay pension contribution = taxable pay of £81k.  But only £9k ends up in your pension.

Relief at source contributions don't reduce your taxable income but have basic rate tax relief added so if you pay £9,000 then £11,250 ends up in your pension fund.  But you still have £90k to pay tax on.  But more of your income is taxed at 20% and less at 40%.

https://www.litrg.org.uk/tax-guides/tax-basics/do-i-have-join-pension-scheme/do-you-know-how-tax-relief-your-pension

sultan123

Dazed_and_C0nfused said:

sultan123 said:

Also why would basic rate band be increased due to SIPP contribution

That's just how they work.  Some pension contributions such as net pay ones reduce your income for tax purposes i.e. salary £90k with 10% net pay pension contribution = taxable pay of £81k.  But only £9k ends up in your pension.

Relief at source contributions don't reduce your taxable income but have basic rate tax relief added so if you pay £9,000 then £11,250 ends up in your pension fund.  But you still have £90k to pay tax on.  But more of your income is taxed at 20% and less at 40%.

https://www.litrg.org.uk/tax-guides/tax-basics/do-i-have-join-pension-scheme/do-you-know-how-tax-relief-your-pension

Ah ok so I would put into SIPP myself instead of source. So once I get my monthly pay post tax and NI, I would invest in SIPP

Dazed_and_C0nfused

sultan123 said:

Dazed_and_C0nfused said:

sultan123 said:

Also why would basic rate band be increased due to SIPP contribution

That's just how they work.  Some pension contributions such as net pay ones reduce your income for tax purposes i.e. salary £90k with 10% net pay pension contribution = taxable pay of £81k.  But only £9k ends up in your pension.

Relief at source contributions don't reduce your taxable income but have basic rate tax relief added so if you pay £9,000 then £11,250 ends up in your pension fund.  But you still have £90k to pay tax on.  But more of your income is taxed at 20% and less at 40%.

https://www.litrg.org.uk/tax-guides/tax-basics/do-i-have-join-pension-scheme/do-you-know-how-tax-relief-your-pension

Ah ok so I would put into SIPP myself instead of source. So once I get my monthly pay post tax and NI, I would invest in SIPP

Yes.  But for most people a SIPP is in addition to your workplace contributions.  Which may use the same method (relief at source).  

There are three commons methods of contributing,

Net pay
Relief at source

Salary sacrifice (this is where you don't pay anything you agree to a reduced salary in return for your employer contributing more)

sultan123

So next year my wage is likely to hit 110k for the next tax year.

If I got £500 from interest due to savings account but then put 10k into a SIPP, my personal allowance would be intact right?

Dazed_and_C0nfused

sultan123 said:

So next year my wage is likely to hit 110k for the next tax year.

If I got £500 from interest due to savings account but then put 10k into a SIPP, my personal allowance would be intact right?

Do you mean £10k gross or £10k net?

sultan123

Dazed_and_C0nfused said:

sultan123 said:

So next year my wage is likely to hit 110k for the next tax year.

If I got £500 from interest due to savings account but then put 10k into a SIPP, my personal allowance would be intact right?

Do you mean £10k gross or £10k net?

10k net so I would get the 10k net from my wages which is paid at end of month

Dazed_and_C0nfused

Then yes your Personal Allowance would be intact.

Your taxable income would be £110,500 and your adjusted net income would be £98,000.

sultan123

Dazed_and_C0nfused said:

Then yes your Personal Allowance would be intact.

Your taxable income would be £110,500 and your adjusted net income would be £98,000.

Ok but the tax is paid on 98k going off what you said about SIPP?

Dazed_and_C0nfused

sultan123 said:

Dazed_and_C0nfused said:

Then yes your Personal Allowance would be intact.

Your taxable income would be £110,500 and your adjusted net income would be £98,000.

Ok but the tax is paid on 98k going off what you said about SIPP?

No, not at all, why do you think that.

All £110,500 is taxable.

You pay £10,000 to the SIPP provider and they add £2,500 in pension tax relief giving you a pension fund of £12,500.

This £12,500 reduces your adjusted net income by £12,500 meaning you will retain your Personal Allowance in full.

But you still have taxable income of £110,500.  The first £12,570 is covered by your Personal Allowance and the remaining £97,930 is taxed.

You get a bigger basic rate band because of the SIPP contribution so more is taxed at 20% and less at 40%.

And the £500 interest is taxed at 0%.