SIPP for low earner

dunstonh

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.

It is clear.  The rules are known and published.   Its just some websites don't display the information clearly in their cut down text.

So, 80% of whatever she earns after salary sacrifice?

She can pay 100% of her earnings into a pension.   pension contributions are considered gross, not net when working out what you can pay towards them.

Albermarle

lucyandthomas said:

This is partly why I asked the question - it really isn’t clear whether low earners can contribute based on their earnings they can or whether they are limited to £2880. No

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? Yes

Answers in bold.
Note that it always works in tax years, not calendar years.
 The pension provider will assume that you are entitled to basic rate tax relief, and add it to all contributions, so it is her responsibility not to contribute too much.
She can add a lump sum early in the tax year, even though she will have only earned a proportion of her annual salary, on the assumption she will have earned enough by the end of the tax year.

lucyandthomas

Thank you all for your help 

kinger101

Not the first time HMRC publish incorrect info, but it would be useful to share actual published tax law for future ref.  

One thing to be careful of then is making sure that the payments via salary sacrifice are sufficient only to get the employer match.Otherwise you're losing out on potential relief. 

But I still think you need to be careful that the tail isn't wagging the dog here.  There are normally other financial objectives for a 19 year old which ought to take precedence over pensions. Getting these right can put one in a better position to maximise contributions later in life.

Dazed_and_C0nfused

kinger101 said:

Not the first time HMRC publish incorrect info, but it would be useful to share actual published tax law for future ref.  

One thing to be careful of then is making sure that the payments via salary sacrifice are sufficient only to get the employer match.Otherwise you're losing out on potential relief. 

But I still think you need to be careful that the tail isn't wagging the dog here.  There are normally other financial objectives for a 19 year old which ought to take precedence over pensions. Getting these right can put one in a better position to maximise contributions later in life.

This is the actual HMRC pension manual, more reliable than gov.uk tends to be.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm041000

sevenhills

lucyandthomas said:

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?

I am in a similar position, I cashed in a private pension five years ago, so I believe that I am limited to £4,000
But my earnings are less than £20,000 so I am doing well to contribute £2,880

Marcon

lucyandthomas said:

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.

If you're set on contributing to her pension, despite the naysayers on this thread, then you could always give your daughter the cash and she could sacrifice more of her salary into her workplace pension, bearing in mind that she can't sacrifice below minimum wage levels. I doubt her employer would thank you (or indeed even permit) frequent changes of amount, but it's possibly a thought worth considering?

kinger101

Marcon said:

lucyandthomas said:

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.

If you're set on contributing to her pension, despite the naysayers on this thread, then you could always give your daughter the cash and she could sacrifice more of her salary into her workplace pension, bearing in mind that she can't sacrifice below minimum wage levels. I doubt her employer would thank you (or indeed even permit) frequent changes of amount, but it's possibly a thought worth considering?

Salary Sacrifice isn't the best option here once the employer match has been obtained though.  The daughter does not pay income tax.  She may pay a small amount of NI depending on the timing of the income.  

By paying into a private relief-at-source scheme, the daughter will get basic-rate relief despite the income not suffering income tax.  She won't via salary sacrifice. 

cloud_dog

dunstonh said:

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?

With the likely annual earnings amount and the use of SS it wouldn't be beneficial to contribute more than the max the employer would match as none of the employees relevant deductions are benefitting from the equivalent of TR or any (much) NIC savings (£9k equates to £750pm).

In this quite rare scenario I would suggest obtaining the maximum employer match, but any additional monies should go in to a PP/SIPP to gain BRT relief even though they are not a tax payer.

lucyandthomas

Thanks again - I hadn’t twigged that sacrificing 10% of her pay into her pension wasn’t the best option, as she doesn’t pay tax anyway. 

So, job for tomorrow is to reduce the percentage she sacrifices down to 7.5%, (currently 10%), which is the minimum she needs to contribute to get the 7.5% from her employer (not 7% as I previously thought). This means she’ll have about £20 more in her pay each month, which is £25 gross each month if she puts it in a sipp. £60 extra each year if she puts it into the sipp rather than salary sacrifice. 

I’ll still add the 2k of my money this tax year as originally planned. 

Not enormous amounts I know, but the aim is just to get her up and running, rather than trying to fill her pension in the early years. As some have said, I realise she’ll have plenty of other uses for her money well before pension age (just as I have plenty of other uses for mine 😀).

Thanks again to all who have responded - really appreciate your time.