SIPP pension contribution and income drawdown in same tax year

250suzuki

Dazed_and_C0nfused said:

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).

Surely there is a link between RAS on my pension contribution and income tax ..... it's the HMRC.
And they enforce the linkage between the two by having rules, such as the rule that I cannot contribute more into the pension than I have earned through employment (apart from the £3600/£2880 which I can contribute even if I don't bother turning up for work any more)  

zagfles

250suzuki said:

Dazed_and_C0nfused said:

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).

Surely there is a link between RAS on my pension contribution and income tax ..... it's the HMRC.
And they enforce the linkage between the two by having rules, such as the rule that I cannot contribute more into the pension than I have earned through employment (apart from the £3600/£2880 which I can contribute even if I don't bother turning up for work any more)  

There is a link, but probably not one that would affect you. For instance, your basic rate rate band is extended by your gross RAS contribution, and your "adjusted net income" is reduced. These generally only affect people earning £50k+.

Your taxable income isn't reduced. Instead, you get basic rate relief claimed by the pension provider. This amounts to much the same thing, except that you also get relief on income which you don't pay tax on ie income within the personal allowance.

But it also obviously means that your personal allowance is used up, you can't have your cake and eat it. You've already had relief on income you haven't even paid tax on, you're not going to still have your PA available!

If instead you'd used your workplace scheme to contribute 100% of earnings via the "net pay" method, then your taxable income would be zero, and you'd have your full PA available. However, you'd have got no tax relief on the amount within your PA, so you wouldn't have been better off.

zagfles

ader42 said:

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.

Yes, but unless OP has maxed out pension contributions in previous years, he's likely to have carry forwards available. So the £40k limit is unlikely to be a limit, just the 100% of earnings tax relief limit (which has no carry forwards)

Dazed_and_C0nfused

250suzuki said:

Dazed_and_C0nfused said:

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).

Surely there is a link between RAS on my pension contribution and income tax ..... it's the HMRC.
And they enforce the linkage between the two by having rules, such as the rule that I cannot contribute more into the pension than I have earned through employment (apart from the £3600/£2880 which I can contribute even if I don't bother turning up for work any more)  

There is no link between the tax you pay and the basic rate pension tax relief you can get.

There are lots of non earning non taxpayers contributing £2,880 (net) each year to get £720 free money.

And you could get £8,000 in pension tax relief despite only paying ~£5,500 in tax.

And say your spouse applied for Marriage Allowance or you were eligible to claim some employment related expenses, you could still get a refund of some of that £5,500.

Getting £8,000 added to your pension doesn't alter that one bit.

250suzuki

zagfles said:

250suzuki said:

Dazed_and_C0nfused said:

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).

Surely there is a link between RAS on my pension contribution and income tax ..... it's the HMRC.
And they enforce the linkage between the two by having rules, such as the rule that I cannot contribute more into the pension than I have earned through employment (apart from the £3600/£2880 which I can contribute even if I don't bother turning up for work any more)  

There is a link, but probably not one that would affect you. For instance, your basic rate rate band is extended by your gross RAS contribution, and your "adjusted net income" is reduced. These generally only affect people earning £50k+.

Your taxable income isn't reduced. Instead, you get basic rate relief claimed by the pension provider. This amounts to much the same thing, except that you also get relief on income which you don't pay tax on ie income within the personal allowance.

But it also obviously means that your personal allowance is used up, you can't have your cake and eat it. You've already had relief on income you haven't even paid tax on, you're not going to still have your PA available!

If instead you'd used your workplace scheme to contribute 100% of earnings via the "net pay" method, then your taxable income would be zero, and you'd have your full PA available. However, you'd have got no tax relief on the amount within your PA, so you wouldn't have been better off.

Thanks, I had not realised that my scenario would result in the tax-free PA being consumed ....

Pat38493

Dazed_and_C0nfused said:

250suzuki said:

Dazed_and_C0nfused said:

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).

Surely there is a link between RAS on my pension contribution and income tax ..... it's the HMRC.
And they enforce the linkage between the two by having rules, such as the rule that I cannot contribute more into the pension than I have earned through employment (apart from the £3600/£2880 which I can contribute even if I don't bother turning up for work any more)  

There is no link between the tax you pay and the basic rate pension tax relief you can get.

There are lots of non earning non taxpayers contributing £2,880 (net) each year to get £720 free money.

And you could get £8,000 in pension tax relief despite only paying ~£5,500 in tax.

And say your spouse applied for Marriage Allowance or you were eligible to claim some employment related expenses, you could still get a refund of some of that £5,500.

Getting £8,000 added to your pension doesn't alter that one bit.

Really?  But if tt is an employer pension where the net relief is applied, and I increase my contributions to 98% or whatever % needed to offset employer contributions,  my personal allowance for that year is used up (but I would not pay any 20% or 40% tax)?

If that's the case, out of interest, how would that be reflected on a tax return?

Albermarle

250suzuki said:

zagfles said:

250suzuki said:

Dazed_and_C0nfused said:

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).

Surely there is a link between RAS on my pension contribution and income tax ..... it's the HMRC.
And they enforce the linkage between the two by having rules, such as the rule that I cannot contribute more into the pension than I have earned through employment (apart from the £3600/£2880 which I can contribute even if I don't bother turning up for work any more)  

There is a link, but probably not one that would affect you. For instance, your basic rate rate band is extended by your gross RAS contribution, and your "adjusted net income" is reduced. These generally only affect people earning £50k+.

Your taxable income isn't reduced. Instead, you get basic rate relief claimed by the pension provider. This amounts to much the same thing, except that you also get relief on income which you don't pay tax on ie income within the personal allowance.

But it also obviously means that your personal allowance is used up, you can't have your cake and eat it. You've already had relief on income you haven't even paid tax on, you're not going to still have your PA available!

If instead you'd used your workplace scheme to contribute 100% of earnings via the "net pay" method, then your taxable income would be zero, and you'd have your full PA available. However, you'd have got no tax relief on the amount within your PA, so you wouldn't have been better off.

Thanks, I had not realised that my scenario would result in the tax-free PA being consumed ....

As said you will get tax relief based on the £12570, even though no tax was paid, so a pretty good deal !