SIPP investments

sultan123

Dazed_and_C0nfused said:

sultan123 said:

Dazed_and_C0nfused said:

sultan123 said:

Dazed_and_C0nfused said:

sultan123 said:

Dazed_and_C0nfused said:

sultan123 said:

If i Invest 2k into a SIPP how much money should I be getting back. Been told I can claim back 40% on this as higher rate tax payer? But I claim back 20% on tax return.

So what amount should I get back?

The higher rate tax relief is entirely dependent on your overall tax position.

The gross contribution (£2,000 or £2,500 depending on whether you mean your £2k is the gross or net amount) increases your basic rate band so more tax is charged at 20% and less at 40%.

But there can be other benefits (reduction of HICBC and less tapering of Personal Allowance being a couple) which mean the personal tax saving could be more.

And it can be less if you haven't paid much higher rate tax.

2k is the amount I am putting into SIPP. Where is £500 addition from as is 20% not £400?

Because pension contributions are based on the gross amount.

You pay the net amount (80%) and the pension company adds the other 20%.

So if you pay £2,000 they will add £500.  Making a gross contribution of £2,500.

£2,500 x 20% = £500

Thank you so with that I can add on 20% tax band?

 2,500.00 +  Basic rate band 37,700.00 =   40,200.00 . 

I was under impression the 2.5k would be removed from adjust net income, e.g. adjusted income is 100k -2.5k but how does SIPP actually help without this?

Personal contributions to a SIPP which are eligible for tax relief have several tax advantages.

1.  You receive basic tax relief i.e. you handover £2,000 and get a pension fund of £2,500.

2.  They increase your basic rate band i.e. you handover £2,000 and this becomes a gross contribution of £2,500 then your basic rate band is increased by £2,500

3.  They reduce your adjusted net income.  For example if your total taxable income was £60,000 and you made a gross contribution of £2,500 (and no Gift Aid payments) then your adjusted net income would be £57,500.

Thank you this makes lot of sense.

However if I have made £100,100 income would the £2500 be subtracted from this or is it just a case of just increasing your basic rate tax band?

If the £100,100 was taxable income then you would be taxed on the whole £100,100.

But you would pay 20% tax on an extra £2,500 meaning less would be taxed at 40%.

And your adjusted net income would be reduced to £97,600.  So instead of having a tapered Personal Allowance of £12,520 you would get a full Personal Allowance of £12,570.

How does the extra 20% tax on 2.5k benefit me in this? 

Dazed_and_C0nfused

Say your taxable income was £60,000 and it was all  from earnings.

This would normally be taxed (after the Personal Allowance)

£37,700 x 20%
£9,730 x 40%

If you have contributed £2,500 (gross) to a SIPP then it would become,

£40,200 x 20%
£7,230 x 40%

sultan123

Dazed_and_C0nfused said:

Say your taxable income was £60,000 and it was all  from earnings.

This would normally be taxed (after the Personal Allowance)

£37,700 x 20%
£9,730 x 40%

If you have contributed £2,500 (gross) to a SIPP then it would become,

£40,200 x 20%
£7,230 x 40%

Ah ok so for arguments sake if I put i  10k into SIPP a lot more of money would be taxed at 20% then?

sultan123

Dazed_and_C0nfused said:

Say your taxable income was £60,000 and it was all  from earnings.

This would normally be taxed (after the Personal Allowance)

£37,700 x 20%
£9,730 x 40%

If you have contributed £2,500 (gross) to a SIPP then it would become,

£40,200 x 20%
£7,230 x 40%

60k you mention here is POST removal of 2.5k from this figure right. E.g. income was 62.5k and then you got it to 60k due to reduction in overall income

Dazed_and_C0nfused

sultan123 said:

Dazed_and_C0nfused said:

Say your taxable income was £60,000 and it was all  from earnings.

This would normally be taxed (after the Personal Allowance)

£37,700 x 20%
£9,730 x 40%

If you have contributed £2,500 (gross) to a SIPP then it would become,

£40,200 x 20%
£7,230 x 40%

Ah ok so for arguments sake if I put i  10k into SIPP a lot more of money would be taxed at 20% then?

Yes.

Using the same example and assuming you mean £10,000 gross then all the income (after the Personal Allowance) would be taxed at 20%.

£47,430 x 20%.

In this situation you wouldn't get an "extra" 20% higher rate tax relief on the whole contribution because you were originally only paying higher rate tax on £9,730.

sultan123

Dazed_and_C0nfused said:

sultan123 said:

Dazed_and_C0nfused said:

Say your taxable income was £60,000 and it was all  from earnings.

This would normally be taxed (after the Personal Allowance)

£37,700 x 20%
£9,730 x 40%

If you have contributed £2,500 (gross) to a SIPP then it would become,

£40,200 x 20%
£7,230 x 40%

Ah ok so for arguments sake if I put i  10k into SIPP a lot more of money would be taxed at 20% then?

Yes.

Using the same example and assuming you mean £10,000 gross then all the income (after the Personal Allowance) would be taxed at 20%.

£47,430 x 20%.

In this situation you wouldn't get an "extra" 20% higher rate tax relief on the whole contribution because you were originally only paying higher rate tax on £9,730.

Sorry last question.

If I earn 120k (all income) then put 10k into SIPP how much tax do I pay (after the personal allowance of £12,570)

mark5

Just to add if your earning 100k per year you probably need to be thinking of putting 10-15k upwards in a pension each year unless you have other pension provision.

I know its not the question you asked but 2k sounds very low for a higher rate tax payer. 

Somebody

Sorry last question.

If I earn 120k (all income) then put 10k into SIPP how much tax do I pay (after the personal allowance of £12,570)

You want to be putting everything over the £100,000 into the SIPP as your pay between £100,000 and £125,140 is effectively taxed at 60% due to you losing your personal allowance completely.

Pat38493

Somebody said:

Sorry last question.

If I earn 120k (all income) then put 10k into SIPP how much tax do I pay (after the personal allowance of £12,570)

You want to be putting everything over the £100,000 into the SIPP as your pay between £100,000 and £125,140 is effectively taxed at 60% due to you losing your personal allowance completely.

This ^^  - when you earn over £100,000 taxable income in one year, they take away £1 of your personal allowance for each £2 you earn, so this effectively means you pay a 60% marginal tax rate on that range of income.  

Better to put any income above £100K into a pension fund unless you absolutely can't do without the cash.

sultan123

mark5 said:

Just to add if your earning 100k per year you probably need to be thinking of putting 10-15k upwards in a pension each year unless you have other pension provision.

I know its not the question you asked but 2k sounds very low for a higher rate tax payer. 

Thanks my overall employment and self employment income came to £100,110

Should the 2.5k from SIPP be removed from £100,110 and then personal allowance applied to work out taxable income?