Confused about pension tax relief on low earnings

elwy

A few years ago I started contributing to a SIPP while unemployed.  I understood the rules meant that I could contribute £2880 a year and obtain 20% tax relief, so I set up a regular monthly payment of £240 into my SIPP.

Since then I've started working part time on a salary of around £7k a year. I don't pay income tax due to low earnings.  I make employee contributions to my workplace pension scheme of around £425 a year.  Now I'm confused about how much I'm allowed to keep contributing to my SIPP and still get tax relief.

Am I right in thinking that since I don't pay income tax, I need to reduce my private SIPP contributions so that I stay under the £2880 limit when my workplace pension contributions are taken into account?

Linton

elwy said:

A few years ago I started contributing to a SIPP while unemployed.  I understood the rules meant that I could contribute £2880 a year and obtain 20% tax relief, so I set up a regular monthly payment of £240 into my SIPP.

Since then I've started working part time on a salary of around £7k a year. I don't pay income tax due to low earnings.  I make employee contributions to my workplace pension scheme of around £425 a year.  Now I'm confused about how much I'm allowed to keep contributing to my SIPP and still get tax relief.

Am I right in thinking that since I don't pay income tax, I need to reduce my private SIPP contributions so that I stay under the £2880 limit when my workplace pension contributions are taken into account?

Your thinking is wrong.  As you have earnings of £7K you can contribute up to £7K gross in total to pensions.

The £3600/£2880 option applies to people with less than £3600 earnings, whether they pay tax is not relevent.

Pat38493

Not exactly - if you are working, your total contributions across all pensions would be limited to the total of your gross annual earned income of 7K.

Therefore you need to know whether your employer is making contributions to your work scheme as well and how much.  

If your gross income is 7K per year, let's assume you put in £425 per year into your work scheme and your employer did the same so £850.  I am assuming this came from the gross amount you are paid.

You could then in theory at least put a further £6150 gross into your SIPP, which would mean you could pay in £4920 from your net money in there (it would receive 20% tax relief which would be added by pension provider).

So you should be fine to carry on paying the £2880 in as it's well within the maximum you could theoretically do.

elwy

Ah thank you.  I couldn't work out from the government website which rules applied to me!

Linton

Pat38493 said:

Not exactly - if you are working, your total contributions across all pensions would be limited to the total of your gross annual earned income of 7K.

Therefore you need to know whether your employer is making contributions to your work scheme as well and how much.  

If your gross income is 7K per year, let's assume you put in £425 per year into your work scheme and your employer did the same so £850.  I am assuming this came from the gross amount you are paid.

You could then in theory at least put a further £6150 gross into your SIPP, which would mean you could pay in £4920 from your net money in there (it would receive 20% tax relief which would be added by pension provider).

So you should be fine to carry on paying the £2880 in as it's well within the maximum you could theoretically do.

???  employer contributions dont come into the earnings limit, just personal contributions.

xylophone

A few years ago I started contributing to a SIPP while unemployed.  I understood the rules meant that I could contribute £2880 a year and obtain 20% tax relief, so I set up a regular monthly payment of £240 into my SIPP.

You were aged under 75 and had no "relevant earnings".

You wanted to make a tax relievable contribution to a SIPP (RAS scheme).

You were limited to a net contribution of £2880 which would be grossed up to £3.600 after the pension provider claimed tax relief from HMRC.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100

You now have gross "relevant earnings" of £7,000 a year.

These are  "chargeable to tax" even though your PA means that you pay no tax.

This means that you could make a total net contribution of up to £5,600 to RAS pension scheme(s) and the provider(s) claim  tax relief up to a total of £1400 and add it to your pot(s).

On the assumption that your workplace scheme operates RAS, you have already made a net contribution of £425 to this scheme.

You could therefore make a net contribution of £5175 to your SIPP.

Pat38493

Linton said:

Pat38493 said:

Not exactly - if you are working, your total contributions across all pensions would be limited to the total of your gross annual earned income of 7K.

Therefore you need to know whether your employer is making contributions to your work scheme as well and how much.  

If your gross income is 7K per year, let's assume you put in £425 per year into your work scheme and your employer did the same so £850.  I am assuming this came from the gross amount you are paid.

You could then in theory at least put a further £6150 gross into your SIPP, which would mean you could pay in £4920 from your net money in there (it would receive 20% tax relief which would be added by pension provider).

So you should be fine to carry on paying the £2880 in as it's well within the maximum you could theoretically do.

???  employer contributions dont come into the earnings limit, just personal contributions.

True yes sorry - so the amount you could put in is even higher, but the answer to the question is still the same that they don't need to reduce the SIPP contribution?

elwy

That's amazingly clear and helpful xylophone, thanks!

Albermarle

elwy said:

Ah thank you.  I couldn't work out from the government website which rules applied to me!

The HMRC info on this subject is less than clear, so you are not alone !

twiglet98

I was about to post a question in a similar vein - nothing like leaving it until the last minute to add to my tiny SIPP.

Linton said:

Pat38493 said:

Not exactly - if you are working, your total contributions across all pensions would be limited to the total of your gross annual earned income of 7K.

Therefore you need to know whether your employer is making contributions to your work scheme as well and how much.  

If your gross income is 7K per year, let's assume you put in £425 per year into your work scheme and your employer did the same so £850.  I am assuming this came from the gross amount you are paid.

You could then in theory at least put a further £6150 gross into your SIPP, which would mean you could pay in £4920 from your net money in there (it would receive 20% tax relief which would be added by pension provider).

So you should be fine to carry on paying the £2880 in as it's well within the maximum you could theoretically do.

???  employer contributions dont come into the earnings limit, just personal contributions.

I reached State Pension age last June and fully retired from my part time job on 31 July.   I earned £3007.72 as an employee.  I was contributing 8% to their DC pension and the employer contributed 12% (4% plus matching my 8%). 

Unsure whether the £3007 limit for a SIPP contribution this year (this afternoon!) was gross or net of the tax uplift, I'm browsing through some of the generic letters I've had from HL and their latest letter, "Pensions: top up by 5 April" says:

"...Usually, you can pay in up to £40,000 in total across all your pensions each tax year.  But if you're a high earner, a low or non-earner, or you've accessed pension benefits already your annual allowance could be significantly lower.  Payments made by you, your employer, someone else and any basic rate tax relief that you automatically receive count towards this allowance."

I can't currently log in as a retiree to my former Workday account to study the old online payslips but I have some scribbled notes suggesting that monthly from April to July my pay was £785.86, my pension contribution was £62.87 and the employer's contribution was £94.31, total contributions therefore £157.18 x 4 months = £628.72.

Do I deduct £628.72, or only my own contributions totalling £251.48, from my earned income of £3007.72 to arrive at the amount I can add to my SIPP today? Or is that figure the total after tax relief so I have to actually put less in?  I haven't added anything else to the SIPP this year. 

What happens if I try to add more than I'm allowed to?

Perhaps I'd be better to put a higher amount into a new ISA instead?

xylophone

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

You earn less than £3600 gross but you can still make a  total net contribution of up to £2880 to a RAS scheme (s}. 

If you have already made a net contribution of £251.48 to  a workplace RAS pension scheme, then you can still contribute £2668.48 to your SIPP.