SIPP for low earner

lucyandthomas

Hi

My daughter is 19, a student and has a part-time supermarket job earning approx 9k per year. She is a member of the work pension, which is a salary sacrifice scheme. She sacrifices 10% of her salary, and her employer adds 7%. I believe this all counts as employer contributions, so she hasn’t used any of her annual allowance.

I was thinking about the advantages of her opening a SIPP too. As a non-taxpayer, would she get tax relief on £2880 rather than on her salary showing on P60?

This would be our money, gifted to her. I want to get something up and running for her while she’s young, with the hope that she’ll add to it herself further down the line. She already has a LISA and other savings.

Thanks all

NoMore

AA is counted against all contributions to pensions, so employer contributions do use it up, although it doesn't matter to your query.

She would actually be able to put up to all her income 7200 net (or 9000 gross assuming that's her earnings after the salary sacrifice) into a SIPP and get Tax relief, despite not paying tax, she is still earning income.

The 2880 (3600 gross) limit is for non earners, not necessarily non - tax payers.

lucyandthomas

Great, thanks 

dunstonh

I was thinking about the advantages of her opening a SIPP too. As a non-taxpayer, would she get tax relief on £2880 rather than on her salary showing on P60?

A SIPP doesn't specifically have those advantages.  All pensions do.  So, she can use her existing scheme if she wishes.  Although some employers may reduce the amount she can pay in.

At age 19 and thinking of her other needs, have you not considered a LISA?

Albermarle

If the £9K is her salary before salary sacrifice.
Then she could contribute to a SIPP.
£9K minus 10% multiplied by 0.8%

Next step is to choose a suitable pension. Mainly it is about the breadth of choice of investments ( many people prefer not too much choice) and charges.

lucyandthomas

Thanks all.

Dunstonh - she already has a LISA and other savings. She can only contribute to her work scheme via payroll, so I thought a sipp would be better as I can put lump sums in as and when.

Albermale - know it’s not everyone’s favourite, but I was planning to open a Vanguard sipp for her, with all contributions going into VLS80. I just want to get her started off and make it easy. Likely to contribute about 2k this tax year, but good to know that she can contribute more if she wants to.

kinger101

Making an early start to pension saving is admirable, but in this case, contributing more is not tax efficient and could actually be detrimental to say getting on the housing ladder etc.

She should continue to contribute to the employer scheme to get the full matching contribution.  

A non-taxpayer can make a contribution of 2880 into a pension and get 20 percent tax relief.  But the pension is taxable in retirement.

In this case, a LISA is more tax efficient as it gets the same government top-up, but is non taxable.  And has the advantage that it can be used for property purchase.

But I'd advise your daughter had a decent pot of instant access savings first.  It's quite possible she'll need it for eg relocatibg for a new job when she graduates.

A good goal at this stage might be three months of independent living expenses.

Albermarle

A non-taxpayer can make a contribution of 2880 into a pension and get 20 percent tax relief.  But the pension is taxable in retirement.

This statement is not correct, as a previous poster already explained.

She would actually be able to put up to all her income 7200 net (or 9000 gross assuming that's her earnings after the salary sacrifice) into a SIPP and get Tax relief, despite not paying tax, she is still earning income.

The 2880 (3600 gross) limit is for non earners, not necessarily non - tax payers.

kinger101

Albermarle said:

A non-taxpayer can make a contribution of 2880 into a pension and get 20 percent tax relief.  But the pension is taxable in retirement.

This statement is not correct, as a previous poster already explained.

She would actually be able to put up to all her income 7200 net (or 9000 gross assuming that's her earnings after the salary sacrifice) into a SIPP and get Tax relief, despite not paying tax, she is still earning income.

The 2880 (3600 gross) limit is for non earners, not necessarily non - tax payers.

HMRC indicate it's the limit for non-taxpayers.

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

Dazed_and_C0nfused

kinger101 said:

Albermarle said:

A non-taxpayer can make a contribution of 2880 into a pension and get 20 percent tax relief.  But the pension is taxable in retirement.

This statement is not correct, as a previous poster already explained.

She would actually be able to put up to all her income 7200 net (or 9000 gross assuming that's her earnings after the salary sacrifice) into a SIPP and get Tax relief, despite not paying tax, she is still earning income.

The 2880 (3600 gross) limit is for non earners, not necessarily non - tax payers.

HMRC indicate it's the limit for non-taxpayers.

If you mean this part of gov.uk then it is simply wrong and unfortunately gov.uk/HMRC seem unwilling to change it.

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

If you do not pay Income Tax

You still automatically get tax relief at 20% on the first £2,880 you pay into a pension each tax year (6 April to 5 April) if both of the following apply to you:

you do not pay Income Tax, for example because you’re on a low income

your pension provider claims tax relief for you at a rate of 20% (relief at source)

lucyandthomas

This is partly why I asked the question - it really isn’t clear whether low earners can contribute based on their earnings or whether they are limited to £2880.

I don’t think I’ll be contributing more than 2k this tax year anyway, but - going forwards - am I correct in understanding that contributions next year can be based on her salary? So, 80% of whatever she earns after salary sacrifice?