Trying to understand Tax on SIPPS paid net 6 March at 12:56PM in Pensions, annuities & retirement planning 25 replies 511 views

Steve_666_

Am I wrong, you pay tax on gross amounts, not on the net. Was reading the III web info on SIPPs and they say with a net contribution into a SIPP of £1000, they will claim £250 (20% tax) for a total of £1250. For a higher rate tax payer (40%) you can claim a further 20%, which they state as £250. I don't think that is correct.

If I earn £1500, I will pay £600 tax at 40%, put the net £900 into the SIPP, and they will claim the 20% of £900 of £225. I will then claim the difference £375, that is £600-£225 back via the tax return.

So for the III example,  if I earn £1667.67, I pay tax of £667.67, invest the £1000 into a SIPP net, claim £250 via the provider, and the difference £416.67 via my tax  return?

Dazed_and_C0nfused

Was reading the III web info on SIPPs and they say with a net contribution into a SIPP of £1000, they will claim £250 (20% tax) for a total of £1250. For a higher rate tax payer (40%) you can claim a further 20%, which they state as £250. I don't think that is correct.

It isn't correct.  If you contribute £1,000 then basic rate tax relief of £250 will be added.

But there is no fixed further 20%.  Any additional tax relief (which saves you money, it doesn't get added to the pension fund) depends on your own tax position for the tax year in question.

Say you pay higher rate tax on £1 then the higher rate relief (given by increasing your basic rate band by the gross contribution) will only be 20p, not £250.

In some scenarios though it could be more than £250.

dunstonh

Am I wrong, you pay tax on gross amounts, not on the net. 

net is the position after tax.    i.e. you pay tax on the gross amount and receive the amount net of tax.

 Was reading the III web info on SIPPs and they say with a net contribution into a SIPP of £1000, they will claim £250 (20% tax) for a total of £1250. For a higher rate tax payer (40%) you can claim a further 20%, which they state as £250. I don't think that is correct.

This is about contributions.  Not about what tax you pay.   I assume your earlier sentence was a typo.
The above is worded in a way that just asks for confusion.
A pension contribution is the gross contribution.   So, in the example above, the pension contribution is £1250.
You receive basic rate tax relief at source.  That is £250.
You pay the net of basic rate contribution of £1,000.  The provider will either immediately give you the tax relief if they prefund or you wait for the tax relief if they do not.
If you are a higher rate taxpayer, you can claim the further 20% relief via self assesemnt which is £250.

If I earn £1500, I will pay £600 tax at 40%, put the net £900 into the SIPP, and they will claim the 20% of £900 of £225. I will then claim the difference £375, that is £600-£225 back via the tax return.

Ok, using those figures, you are making a pension contribution of £1,125
You receive £225 relief at source.
You can claim a further £225 relief via self-assessment

Steve_666_

"Am I wrong, you pay tax on gross amounts, not on the net. " was an assertion rather than a question.

My question was based on the fact that SIPP providers assume that you are a 20% tax payer and base their reclaim on that hence, the 25% of the net contribution, in the example 250 of 1000. As a 40% tax payer you actually paid 666.67 tax on the 1666.67, and therefore you would expect the HMRC system to understand that and refund the difference, 666.67 - 250 = 416.67

NoMore

Forget what actually happens and think of it like this. On a gross of 1250 at 40% tax how much tax would you expect to pay ? 

It’s £500. And this is the total tax relief you get, 250 in the pension and 250 retuned to you.  So for a cost of 750 you have got 1250 in to your pension. 

Steve_666_

NoMore, on a net contribution of £750, they will claim back 750x0.25 = £187.50

Linton

Steve_666_ said:

"Am I wrong, you pay tax on gross amounts, not on the net. " was an assertion rather than a question.

My question was based on the fact that SIPP providers assume that you are a 20% tax payer and base their reclaim on that hence, the 25% of the net contribution, in the example 250 of 1000. As a 40% tax payer you actually paid 666.67 tax on the 1666.67, and therefore you would expect the HMRC system to understand that and refund the difference, 666.67 - 250 = 416.67

SIPP providers do not assume anything about your tax position.  You get a 25% uplift regardless of whether you actually paid any tax on the money.

To understand after-tax pension payments you will avoid confusing yourself if you always think in terms of gross contribution.  So if you want to make a  £1250 gross contribution as a higher rate tax payer you will have paid £500 tax on that amount, £250 basic rate and £250 extra for the higher rate tax.

So you actually pay £1000 into your pension and get the missing £250 added on by HMRC through the provider.  That leaves the £250 higher rate component.  HMRC refunds this to you personally, not to your pension.

Roger175

Steve_666_ said:

NoMore, on a net contribution of £750, they will claim back 750x0.25 = £187.50

Read what NoMore said again. "you get, 250 in the pension and 250 retuned to you" so, in this example, you make a payment of £1,000 and get £250 tax relief, so £1,250 ends up in the pension. Then, as a separate operation, you claim back another £250 on your tax return so the net payment you actually make is £750.

Albermarle

Steve_666_ said:

NoMore, on a net contribution of £750, they will claim back 750x0.25 = £187.50

In the past I also thought it worked like you do, but it does not. The other posters are correct .

Steve_666_

So know I'm confused,
I have a SS pension.

I've decide to increase my pension contribution by £1666.67 pcm and reduce my gross pay by the same amount.
When I compare my pay slip to the month before, I can see that my tax has reduced by £667.67 (40%) and my net sum by £1000 (60%) . Glad I didn't decide to open a PP SIPP and contribute the net £1000

NoMore

Forget trying to work it out from the net contribution to the pension that’s where your going wrong.