2 Pensions: What are the rules regarding tax relief.

singhini

Until recently i have been unemployed but have continued to pay £240 a month into my SIPP (even though unemployed, the SIPP provider claims £60 tax relief a month which to my understanding is allowed and is correct). Link to Gov website (see bottom of the page "If you do not pay income tax;")  Tax on your private pension contributions: Tax relief - GOV.UK (www.gov.uk)

However; 5 months ago i got a part-time job and earn £750 a month (i pay no income tax or NI as i don't earn enough nor am i part of the work place pension). On Friday i.e. two days ago my director came upto me to say that in the next few weeks time i.e. the start of February he will need to do my 6 month probationary period review (he went onto say, don't worry you have passed the probationary and infact he is wanting to increase my hours and hoping to increase my salary to £1,000 a month from either April or May onwards.

If my salary does go upto £1,000 a month i will still not be an Income tax or NI payer, however my employer will have to auto enrol me into a company pension as my annual salary will be over £10,000 and both of us will have to put money into it (the company pension is a salary sacrifice scheme and it is made up of 5% and 3% contributions from me and my employer respectively i.e. 8%). 

My question is: If i don't pay any tax but my company pension is receiving 5% + 3% tax free contributions, does this effect my SIPP contributions?

I've spent this weekend looking into this but i can't find any info.
If i approach this as a lay person and if someone came upto me and said they put £2,880 into a SIPP each year and receive £720 tax relief and also they have a company pension which was salary sacrifice and 8% went into that tax free, yet they pay no tax what so ever i would say that sounds like nonsense. 

Any advice on the aforementioned is much appreciated. 

MX5huggy

The amazing thing is you can receive tax relief on income you’ve not paid tax on. 

So as you have discovered if you have no income the limit is £2880 that has tax relief added to it to make a gross contribution of £3600.

Once you earn over that then the gross limit is your total gross salary each tax year. So if you earn £10k this tax year you can put £8k in the pension and get £2k “tax relief” added to it. 

There’s another limit the Annual Allowance but that is £40k so ignore. There’s also MPAA, £4k limit if you’ve ever taken any money out of a pension in some ways. 

Now the bad news, Salary Sacrifice (SS) is not a good way for a non tax payer (due to low income) to receive pension contributions, with SS the tax relief is not added on. But because you’ve sacrificed the salary you don’t pay tax or NI on it in the first place. The other this is what’s your hourly rate? Because you can’t SS below the National Minimum Wage. If SS is the only way they do Pension then it’s probably worth still doing due to the employer contribution but don’t add any more contributions that way, keep using your sipp until you are paying tax. 

Albermarle

You should ask your employer if it is possible for you to pay your 3% contribution out of your net/take home pay, as salary sacrifice is a poor system for people not earning enough to pay tax ( as explained above). Probably they will say no, because it will complicate their payroll, but you can ask/make the point anyway.
Or even better if your salary was a little more than £1000 a month and your annual salary was say £13K pa. Then you would be a taxpayer and then salary sacrifice would work for you.

singhini

I'm a bit confused, did you mean 5% ?

If my employer did agree for my contribution coming from my net pay then the pension provider would try to claim tax relief but that would be wrong as no tax would have been paid (at my monthly wage it makes no difference if its gross or net pay that we use as they are the same i.e. no tax deductions)

Albermarle said:

You should ask your employer if it is possible for you to pay your 3% contribution out of your net/take home pay, as salary sacrifice is a poor system for people not earning enough to pay tax ( as explained above). Probably they will say no, because it will complicate their payroll, but you can ask/make the point anyway.
Or even better if your salary was a little more than £1000 a month and your annual salary was say £13K pa. Then you would be a taxpayer and then salary sacrifice would work for you.

singhini

I think I'm confusing myself and everybody else.

So to summaries, I'm putting £240 each month into my SIPP and getting £60 tax relief added to it each month (even though i don't pay any income tax or NI). So that's £720 extra in my SIPP even though i pay no tax.

i recently started working but i still pay no income tax or NI as im an a low earner.

I will be joining the company pension scheme in a few months time and will be putting money into that tax free i.e. as salary sacrifice because that's how the company pension is set up (and i'm still not a tax payer due to still being a low earner).

my question is am i supposed to reduce my £240 SIPP contributions to take into account the money going into my company pension ?

What's confusing me is the £720
My understanding is a person can only claim £720 tax relief annually if they pay no tax. Therefore i am doing this already and if i join the work pension then surely that means i am getting tax relief on those contributions aswell as receiving the £720 and thus going above the £720 

If i put 5% of my salary into the company pension which i guess will be about £30 then in theiry it has avoided £6 of income tax but in reality it hasn't avoided £6 in tax as i don't pay tax so is it ok to keep putting £240 into my SIPP and also put £30 into my company pension and me not breaking the law.

Dazed_and_C0nfused

What's confusing me is the £720
My understanding is a person can only claim £720 tax relief annually if they pay no tax. Therefore i am doing this already and if i join the work pension then surely that means i am getting tax relief on those contributions aswell as receiving the £720 and thus going above the £720 

That's wrong.  If you earned say £10,000 and paid no tax you could contribute £10,000, £8,000 of which would be paid by you and £2,000 would be basic rate tax relief added by the pension company.

The contribution would have to be made using the relief at source (RAS) method i.e. a personal contribution to a SIPP or personal pension.

Salary sacrifice isn't ideal when you aren't paying tax but at the end of the day it's better in your pension than not being paid into it.

singhini

@Dazed_and_C0nfused
You always give sound advice but that sounds bonkers. 
So what we are saying is if/when my salary goes upto £1,000 a month: Yes its OK to join the company pension scheme and put 5% = £30 a month into that (and receive free money from my employer aswell i.e. 3%). AND for me to take home £970 net which i therefore have paid NO income tax or NI and for me to then increase my SIPP payments from £240 to say £800 and receive £200 tax relief.

that cant be right?  

Dazed_and_C0nfused

singhini said:

@Dazed_and_C0nfused
You always give sound advice but that sounds bonkers. 
So what we are saying is if/when my salary goes upto £1,000 a month: Yes its OK to join the company pension scheme and put 5% = £30 a month into that (and receive free money from my employer aswell i.e. 3%). AND for me to take home £970 net which i therefore have paid NO income tax or NI and for me to then increase my SIPP payments from £240 to say £800 and receive £200 tax relief.

that cant be right?  

Providing you keep within the limits for tax relief i.e. you don't contribute a gross amount that is more than your taxable earnings then you would be fine.

Have a read of this.

https://www.litrg.org.uk/tax-guides/tax-basics/do-i-have-join-pension-scheme/do-you-know-how-tax-relief-your-pension

singhini

OK, so i think ive got this. 

In an ideal world my employer does my 6 month review in a few weeks, i pass and he increases my hours starting 1st April and in turn that means my monthly salary will now be £1,000 (£12,000 per annum). This means i still pay no income tax or any NI as i still dont earn enough, however i am now auto enrolled into the work place pension and my company enrol me in April and dont delay the enrolment by upto 3 months which they could do if they wanted to.

As of April i am enrolled into the company pension scheme and i pay in 5% (which is roughly £30) a month tax free i.e. salary sacrifice (even though technically there is no tax to pay on that money in the first place). Also i get a few extra £ from my employer as he is required to pay in 3% (about £20).

i then take home £970 as take-home pay (£1,000 -£30).

from this £970 i now increase my SIPP contribution from £240 upto £400 (obviously i wont be putting all the £970 into the SIPP as i need money to live on). The SIPP provider then claims tax relief on the £400 which is £100 (which is equivalent to £1,200 tax relief a year which is totally legitimate and i was completely wrong for thinking i could only claim a maximum of £720 a year as tax relief as i pay not tax).

So to summaries, From April i have 2 pensions on the go and in my SIPP each month there is £400 contribution + £100 tax relief (i.e. £500) and in my Company Pension there is £30 from my salary + £20 from my employers contribution (i.e. £50). and i have £570 take home pay to spend on pizza & beer  essentials 

in the words of Derek "Del Boy" Trotter    ""Cushty""

Now Ive discovered something else, i potentially have a £5,000 starting rate for savings.
Since i only earn £12,000 which is below the £12,570 personal allowance and no other income, i can have a savings rate of £5,000 (and not £1,000 which i thought). However the amount of interest i will actually earn in a year on my savings will be roughly £300 but nonetheless in theory i have a £5,000 allowance.

Again in the words of Derek "Del Boy" Trotter    ""Lovely Jubbly"" 

Getting_greyer

Wouldn't it be £50 and £30 contributions to workplace scheme?

singhini

Getting_greyer said:

Wouldn't it be £50 and £30 contributions to workplace scheme?

I don't know to be honest (my figures were back of a fag packet stuff).
I think its supposed to be: Salary - LEL x % / 12 months

So for me its: £12,000 - £6,240 = £5,760 x 5% = £288 / 12 months = £24 
And for my boss: £12,000 - £6,240 = £5,760 x 3% = £173 / 12 months = £14.40

All i know is i thought i could only claim a max of £720 tax relief a year as i pay no tax because i don't earn enough and apparently i'm wrong and i could potentially be claiming as much as £2,000 a year.

I still don't really get any of this stuff.

I just read some other stuff about CGT and the AEA rate has historically been £12,300 for individuals but next year its only going to be £6,000 and the years after that i.e. 2024/2025 onwards its only £3,000 (doesn't affect me as i don't have anything that's subject to CGT but i do feel for those who might have).