Annual allowance

Zarjaz

Apologies if this has been asked and answered recently.

I've just retired, with a pension of around £39k pa. I'm lucky enough to have a part-time job bringing in around £40k pa. 

I know that I will therefore fall into the higher tax bracket. My question is can I put all £40k pa into a SIPP? Or, is my £40k annual allowance before tax relief? In other words, can I only put in £24096 each year, to make the total £40k after 40% relief? Or can input the full £40k into the SIPP, and effectively turn this into £66400?

Sorry if this is a daft question!

Albermarle

The maximum you can add gross to a pension is £40K, as this is your earnings. The SIPP provider will automatically add basic rate tax relief, so the maximum you can add is £32K and they will add £8K .
Then you need to inform HMRC about this contribution (they are interested in the gross figure, so including tax relief).
When they do your tax calculation for the year, it will reduce the amount of 40% tax you have to pay and assuming you have already paid this tax, you will get a rebate.
Be aware that they will adjust your tax code on the assumption you will do this every year. So you will get more take home pay and no rebate needed. If you do not intend to make the same contribution, you need to inform them. 

MX5huggy

What sort of pension are you getting? Defined Benefit or an annuity in payment then you are ok. 

A Defined Contribution where you have draw down of 1p or more of taxable income then you have triggered MPAA and your AA is now £4000. 

Zarjaz

Albermarle said:

The maximum you can add gross to a pension is £40K, as this is your earnings. The SIPP provider will automatically add basic rate tax relief, so the maximum you can add is £32K and they will add £8K .
Then you need to inform HMRC about this contribution (they are interested in the gross figure, so including tax relief).
When they do your tax calculation for the year, it will reduce the amount of 40% tax you have to pay and assuming you have already paid this tax, you will get a rebate.
Be aware that they will adjust your tax code on the assumption you will do this every year. So you will get more take home pay and no rebate needed. If you do not intend to make the same contribution, you need to inform them. 

Thank you. This is very helpful. The £40k I make from part-time work is paid gross (basically I need to invoice every month), so no tax has been deducted from what I receive, and I complete a Self Assessment each year. Does this make a difference to me being able to put the £32k into a SIPP?

Zarjaz

MX5huggy said:

What sort of pension are you getting? Defined Benefit or an annuity in payment then you are ok. 

A Defined Contribution where you have draw down of 1p or more of taxable income then you have triggered MPAA and your AA is now £4000. 

Thank you. It's a defined benefit scheme (the 1995 NHS scheme).

Albermarle

Zarjaz said:

Albermarle said:

The maximum you can add gross to a pension is £40K, as this is your earnings. The SIPP provider will automatically add basic rate tax relief, so the maximum you can add is £32K and they will add £8K .
Then you need to inform HMRC about this contribution (they are interested in the gross figure, so including tax relief).
When they do your tax calculation for the year, it will reduce the amount of 40% tax you have to pay and assuming you have already paid this tax, you will get a rebate.
Be aware that they will adjust your tax code on the assumption you will do this every year. So you will get more take home pay and no rebate needed. If you do not intend to make the same contribution, you need to inform them. 

Thank you. This is very helpful. The £40k I make from part-time work is paid gross (basically I need to invoice every month), so no tax has been deducted from what I receive, and I complete a Self Assessment each year. Does this make a difference to me being able to put the £32k into a SIPP?

No difference . How much tax you pay/will pay later, is not directly connected to how much tax relief you can get.

The reason is that there are fixed rules on tax relief on pension contributions. The one relevant to you is that the max you can add is = to your gross salary.

When it comes to how much tax you actually pay, this can be affected by many different things, such as income from other sources, benefits in kind etc.

As an example someone earning £10K gross, can add £8K to their pension , topped up with £2k tax relief, even though they pay no tax at all. 

Zarjaz

Thanks 

So if I understand you correctly, I contribute £32k to my SIPP. THE scheme automatically claim 20% tax relief and add this to my £32k giving £40k pension contribution. I then include this £40k in my self assessment. 

Do I then get a cheque from HMRC for the additional 20% relief as a higher rate tax payer (ignoring any BiK etc)?

Albermarle

Zarjaz said:

Thanks 

So if I understand you correctly, I contribute £32k to my SIPP. THE scheme automatically claim 20% tax relief and add this to my £32k giving £40k pension contribution. I then include this £40k in my self assessment. 

Do I then get a cheque from HMRC for the additional 20% relief as a higher rate tax payer (ignoring any BiK etc)?

More likely a bank transfer. 

Dazed_and_C0nfused

Zarjaz said:

Thanks 

So if I understand you correctly, I contribute £32k to my SIPP. THE scheme automatically claim 20% tax relief and add this to my £32k giving £40k pension contribution. I then include this £40k in my self assessment. 

Do I then get a cheque from HMRC for the additional 20% relief as a higher rate tax payer (ignoring any BiK etc)?

No, you have misunderstood the higher rate tax relief element as there is no "additional 20% relief" in the way you expect.

The gross contribution of £40k will increase your basic rate tax band by £40k meaning more tax is paid at 20% and less at 40%.

This might mean you save £8k in tax but the extract amount is totally dependent on how much of your income is taxed at 40% in the first place.

And you are highly unlikely to get a tax refund as you will have tax owed from your £40k of self employment profits.  Plus Class 2 and 4 National Insurance.

But it will be a smaller bill than would be without the pension contributions.

NB.  Based on the information provided you would only be paying higher rate tax on c£28-£29k so impossible to get higher rate tax relief on £40k.

Zarjaz

Dazed_and_C0nfused said:

Zarjaz said:

Thanks 

So if I understand you correctly, I contribute £32k to my SIPP. THE scheme automatically claim 20% tax relief and add this to my £32k giving £40k pension contribution. I then include this £40k in my self assessment. 

Do I then get a cheque from HMRC for the additional 20% relief as a higher rate tax payer (ignoring any BiK etc)?

No, you have misunderstood the higher rate tax relief element as there is no "additional 20% relief" in the way you expect.

The gross contribution of £40k will increase your basic rate tax band by £40k meaning more tax is paid at 20% and less at 40%.

This might mean you save £8k in tax but the extract amount is totally dependent on how much of your income is taxed at 40% in the first place.

And you are highly unlikely to get a tax refund as you will have tax owed from your £40k of self employment profits.  Plus Class 2 and 4 National Insurance.

But it will be a smaller bill than would be without the pension contributions.

NB.  Based on the information provided you would only be paying higher rate tax on c£28-£29k so impossible to get higher rate tax relief on £40k.

Thanks so much for your helpful comments. 

I should have added that I pay tax in Scotland, so our thresholds are rather lower.  

Qyburn

So 41% rather than 40%.  But for your tax relief the pension plan will claim 20% even for the part of your earnings that would have only been taxed at 19%.  Think of that as a rare gift from Westminster.