SIPP query

Cheftyke1

Hello I am self employed and thinking about opening a SIPP. 

Interactive investor looks good as it doesn’t take a percentage. 

In terms of the tax how does it work in practice. Most website say that effectively the government ‘adds’ the tax relief so if I put £4000 in the government tops it up to £5000 but how does this actually work? Where and how does the government add their bit? 

I understand the higher rate tax relief is done via self assessment , so is it the same as that for the basic?

any help would be appreciated! Thanks 

dunroving

Cheftyke1 said:

Hello I am self employed and thinking about opening a SIPP. 

Interactive investor looks good as it doesn’t take a percentage. 

In terms of the tax how does it work in practice. Most website say that effectively the government ‘adds’ the tax relief so if I put £4000 in the government tops it up to £5000 but how does this actually work? Where and how does the government add their bit? 

I understand the higher rate tax relief is done via self assessment , so is it the same as that for the basic?

any help would be appreciated! Thanks 

In terms of your first question, it "just appears" in your account with the SIPP provider at some point after your initial investment (so, in your example, a few weeks after you pay in the £4,000). I can't be sure, but I think some providers actually add it in advance of receiving it from HMRC. It will appear as cash, and then you decide how to invest it.

dunstonh

In terms of the tax how does it work in practice. Most website say that effectively the government ‘adds’ the tax relief so if I put £4000 in the government tops it up to £5000 but how does this actually work? Where and how does the government add their bit? 

Basic rate tax relief is a reduction. Not an addition.    i.e. if you made a £5,000 pension contriubtion then you pay only pay £4,000 of that because of the tax relief.  The provider claims the relief on your behalf.     Many providers will pre-fund that tax relief so you get it immediately but the smaller players tend not to prefund.  So, you have to wait until HMRC pay them before you get it.

So, assuming no prefunding, you would have made a £5000 pension contribution on day 1.   £4000 would be available to investment immediately, with the £1000 relief being available upto around 6 weeks later.

Cheftyke1

Thanks both that’s very helpful 

sevenhills

dunstonh said:

In terms of the tax how does it work in practice. Most website say that effectively the government ‘adds’ the tax relief so if I put £4000 in the government tops it up to £5000 but how does this actually work? Where and how does the government add their bit? 

Basic rate tax relief is a reduction. Not an addition.    i.e. if you made a £5,000 pension contriubtion then you pay only pay £4,000 of that because of the tax relief.  The provider claims the relief on your behalf.     Many providers will pre-fund that tax relief so you get it immediately but the smaller players tend not to prefund.  So, you have to wait until HMRC pay them before you get it.

So, assuming no prefunding, you would have made a £5000 pension contribution on day 1.   £4000 would be available to investment immediately, with the £1000 relief being available upto around 6 weeks later.

HL don't pre-fund, so it's not down to the size of the provider. I assume HL are one of the larger companies?

Notepad_Phil

Cheftyke1 said:

Hello I am self employed and thinking about opening a SIPP. 

Interactive investor looks good as it doesn’t take a percentage. 

...

I'm with interactive investor myself and for me they are very good on costs, however if you are starting from scratch then it might be a while before it's actually cheaper than one of the percentage based platforms.

So you might find that it's worthwhile to open and fund a sipp on a percentage based platform first, and then transfer across to interactive investor once you have sufficient money invested to make it financially advantageous.

zagfles

sevenhills said:

dunstonh said:

In terms of the tax how does it work in practice. Most website say that effectively the government ‘adds’ the tax relief so if I put £4000 in the government tops it up to £5000 but how does this actually work? Where and how does the government add their bit? 

Basic rate tax relief is a reduction. Not an addition.    i.e. if you made a £5,000 pension contriubtion then you pay only pay £4,000 of that because of the tax relief.  The provider claims the relief on your behalf.     Many providers will pre-fund that tax relief so you get it immediately but the smaller players tend not to prefund.  So, you have to wait until HMRC pay them before you get it.

So, assuming no prefunding, you would have made a £5000 pension contribution on day 1.   £4000 would be available to investment immediately, with the £1000 relief being available upto around 6 weeks later.

HL don't pre-fund, so it's not down to the size of the provider. I assume HL are one of the larger companies?

The older more traditonal pension providers, generally ones who don't like dealing directly with the public and insist on an intermediary, tend to "pre-fund", ie basically give you an interest free loan until the tax relief come through. Obviously like retailers who give interest free loans they just recoup the cost elsewhere. 

HMRC will pay the tax relief on a timetable something like (eg) contributions 6th Jan to 5th Feb paid 21st March, so about 6-10 weeks after the contributions.

Albermarle

sevenhills said:

dunstonh said:

In terms of the tax how does it work in practice. Most website say that effectively the government ‘adds’ the tax relief so if I put £4000 in the government tops it up to £5000 but how does this actually work? Where and how does the government add their bit? 

Basic rate tax relief is a reduction. Not an addition.    i.e. if you made a £5,000 pension contriubtion then you pay only pay £4,000 of that because of the tax relief.  The provider claims the relief on your behalf.     Many providers will pre-fund that tax relief so you get it immediately but the smaller players tend not to prefund.  So, you have to wait until HMRC pay them before you get it.

So, assuming no prefunding, you would have made a £5000 pension contribution on day 1.   £4000 would be available to investment immediately, with the £1000 relief being available upto around 6 weeks later.

HL don't pre-fund, so it's not down to the size of the provider. I assume HL are one of the larger companies?

Although HL are big in the UK retail investment markets, they are not quite as big as some of the more traditional pension providers as referred to above. A quick google of ' assets under management'  reveals HL around the £100 billion mark. Royal London have £150 Billion, Aegon £275 Billion and Aviva £350 Billion, just to give a few examples.

LHW99

II doesn't pre-fund, so its received 6-10 weeks after (depending on when) the cash reached the account, as zagfles says