SIPP pension contribution and income drawdown in same tax year

250suzuki

Hi,

Looking for a sanity check please regarding this scenario

In a given tax year (say 2023-2024), if I have total employment earnings of £40K and contribute them to my SIPP, using up my annual allowance:

1) I would at this point have incurred £0K taxable income, and my personal allowance of £12570 would still be available?

2) Later in the same tax year if I retire and take "income drawdown" from my SIPP, will tax only be due on any drawdown income exceeding my £12570 allowance?

3) Does taking the SIPP income drawdown later in the tax year, alter my entitlement to £40K annual allowance for the SIPP contribution made earlier in the tax year?

Hope my description makes sense .....


Regards

Dazed_and_C0nfused

1.  You have misunderstood how pension contributions work.  Relief at source contributions, the primary method to personally contribute to a SIPP, don't reduce your taxable income.

If you plan on contributing using a different method then you may have lower taxable income but that would be very unusual (impossible?) for personal contributions to a SIPP.

2.  You would pay tax on it all as you have earnings of £40,000 which have used your Personal Allowance.  But you wouldn't pay any higher rate tax as your basic rate band would be £77,700 not £37,700.

3.  No.  But from the point you take taxable income (other than an annuity) from the SIPP you will have triggered MPAA limiting any future contributions.

Marcon

250suzuki said:

Hi,

Looking for a sanity check please regarding this scenario

In a given tax year (say 2023-2024), if I have total employment earnings of £40K and contribute them to my SIPP, using up my annual allowance:

1) I would at this point have incurred £0K taxable income, and my personal allowance of £12570 would still be available?

If you are in employment, then your employer should be making a contribution to a pension scheme on your behalf, so that would limit how much you could contribute. The maximum is £40,000 including tax relief on any personal contributions, plus whatever amount your employer pays in (employer contributions are always paid gross).

Going back to your scenario, if you have earnings of £40K and are contributing to a SIPP, you could only pay in £32,000 - personal contributions are paid net and the provider adds the tax relief at basic rate to your SIPP. So you'd already have £8,000 of earned income in the tax year.

250suzuki said:

2) Later in the same tax year if I retire and take "income drawdown" from my SIPP, will tax only be due on any drawdown income exceeding my £12570 allowance?

Assuming you have not taken 25% of your pot as tax free cash at the outset, then 25% of each withdrawal will be tax free. Tax would (potentially) be payable on the remaining 75%.

250suzuki said:

3) Does taking the SIPP income drawdown later in the tax year, alter my entitlement to £40K annual allowance for the SIPP contribution made earlier in the tax year?

Not if you have earned income of (at least) £40,000 and make the £32,000 (net) contribution before you take any taxable income from your SIPP. The moment you 'flexibly access' your SIPP you trigger the Money Purchase Annual Allowance, immediately limiting yourself to £4,000 a year contributions (includes tax relief on personal contributions, plus any employer contribution) - but it's not retrospective in the year you trigger it.
 

Dazed_and_C0nfused

Going back to your scenario, if you have earnings of £40K and are contributing to a SIPP, you could only pay in £32,000 - personal contributions are paid net and the provider adds the tax relief at basic rate to your SIPP. So you'd already have £8,000 of earned income in the tax year

Where are getting this figure from?

250suzuki

Thanks for the feedback.
Yes, when I said £40K I actually mean £40K gross, which is made up of my employers gross contribution (into a different pension scheme), plus my net contribution to my SIPP.
So it's a total of £40K gross contribution across both schemes

ader42

The £40k also includes Tax Relief added by the provider.

So as I understand it, if you employer puts in £20k you can only put £16k in your SIPP and the provider would add £4k tax relief. Total = £40k.

ader42

@Dazed_and_C0nfused

I assumed for example the scenario could have been a self employed person earning £40k but putting maximum into a SIPP of £32k, the £8k Tax Relief taking it to £40k and the £8k “earned income” being the £8k taxable earnings not put into the SIPP.

Dazed_and_C0nfused

ader42 said:

@Dazed_and_C0nfused

I assumed for example the scenario could have been a self employed person earning £40k but putting maximum into a SIPP of £32k, the £8k Tax Relief taking it to £40k and the £8k “earned income” being the £8k taxable earnings not put into the SIPP.

But that would still mean the earnings were £40k, not £8k.

Contributions made using the relief at source method don't reduce your income for tax purposes. 

If they did you'd actually get double tax relief, once when the pension company adds the basic rate relief and then a second time when you avoided paying tax because your income was seen as £8k not £32k.

And that doesn't happen, you get the basic rate relief added to your pension but your taxable income remains £40k.

250suzuki

OK, maybe I was using incorrect terminology when I wrote "£0K taxable income"
But my point was that if I earned £40K gross, and then paid £32K net into my pension (my employers contribution is small so I have ignored it for simplicity), then I would have ended up with £40K gross in the pension, and would have effectively paid no tax as a result of the pension tax relief.

Regards

Dazed_and_C0nfused

250suzuki said:

OK, maybe I was using incorrect terminology when I wrote "£0K taxable income"
But my point was that if I earned £40K gross, and then paid £32K net into my pension (my employers contribution is small so I have ignored it for simplicity), then I would have ended up with £40K gross in the pension, and would have effectively paid no tax as a result of the pension tax relief.

Regards

No, you have totally misunderstood how relief at source pension contributions work.

There is no link whatsoever between the tax relief that gets added to your RAS pension contribution and the income tax you have personally paid.

You will have paid say £5,500 in income tax.  And received £8,000 in pension tax relief.

But any additional taxable pension or earnings income you receive in the same tax year will be taxed at 20% (or a mix of 20% and 40% if have a lot more income).

Audaxer

250suzuki said:

OK, maybe I was using incorrect terminology when I wrote "£0K taxable income"
But my point was that if I earned £40K gross, and then paid £32K net into my pension (my employers contribution is small so I have ignored it for simplicity), then I would have ended up with £40K gross in the pension, and would have effectively paid no tax as a result of the pension tax relief.

Regards

If I understand it, your point is that you have received more tax relief on the pension contribution than the tax you paid on the original £40k of earnings. That is correct, but you have used up your £12,570 personal tax allowance, so any drawdown you make in the same tax year will be subject to tax.