Question on higher rate tax relief on SIPP payments

WoodsPastor

Could someone sort this out for me in my head. I have always paid pension contributions through salary sacrifice before, so very simple to work out the tax. I am also now contributing to a SIPP. 

I understand that the 20% tax relief on those payments is claimed by the SIPP provider and paid directly into the pension fund. And that I can then claim a further 20% back through a tax return. Is it correct that that further 20% is paid to me in cash, or is it put straight into a pension scheme? 

If it's paid in cash, could someone explain to me why the relief goes into different places, and if there are any implications for future tax returns - eg do I get even more relief if I transfer the higher rate portion back into my SIPP?

handful

20% is as you say claimed by the SIPP provider and paid in automatically and the rest is basically an adjustment to your tax code and you can do this by speaking to HMRC rather than wait and do it on a tax return. This may not be true for every circumstance but is the case for me. You would be free to calculate the value of the tax code adjustment and pay this into the SIPP up to the limit of £60k PA or your earnings whichever is lower.

WoodsPastor

I have to do a tax return as I earn over 100k so was planning to do it at that point. So it's true that half the relief is locked away until I retire but half I can spend now?

Doctor_Who

WoodsPastor said:

Could someone sort this out for me in my head. I have always paid pension contributions through salary sacrifice before, so very simple to work out the tax. I am also now contributing to a SIPP. 

I understand that the 20% tax relief on those payments is claimed by the SIPP provider and paid directly into the pension fund. And that I can then claim a further 20% back through a tax return. Is it correct that that further 20% is paid to me in cash, or is it put straight into a pension scheme? 

If it's paid in cash, could someone explain to me why the relief goes into different places, and if there are any implications for future tax returns - eg do I get even more relief if I transfer the higher rate portion back into my SIPP?

Correct, 20% tax relief is added to the SIPP. I had several refunds from HMRC over the years for higher rate relief after completing SA. What you do with that money is up to you, you can add it to your SIPP if you want (within allowances of course).

NoMore

You get it back as cash (or possibly via a tax code change), People always seem to get confused about this, but the tax relief does end up in your pension, its just not as simple as the initial 20% tax relief.

You put £800 in and get 20% tax relief added to take it to £1000, but wait your a 40% tax payer so it should only be £600 to pay into a your pension to end up with £1000. So HMRC give you £200 in 'change' back so you now have effectively paid in £600 into the Pension and ended up with £1000 after the tax relief. 

WoodsPastor

NoMore said:

You get it back as cash (or possibly via a tax code change), People always seem to get confused about this, but the tax relief does end up in your pension, its just not as simple as the initial 20% tax relief.

You put £800 in and get 20% tax relief added to take it to £1000, but wait your a 40% tax payer so it should only be £600 to pay into a your pension to end up with £1000. So HMRC give you £200 in 'change' back so you now have effectively paid in £600 into the Pension and ended up with £1000 after the tax relief. 

You've put it really simply - thanks. So effectively I've overpaid up front. Thanks very much.

Linton

WoodsPastor said:

Could someone sort this out for me in my head. I have always paid pension contributions through salary sacrifice before, so very simple to work out the tax. I am also now contributing to a SIPP. 

I understand that the 20% tax relief on those payments is claimed by the SIPP provider and paid directly into the pension fund. And that I can then claim a further 20% back through a tax return. Is it correct that that further 20% is paid to me in cash, or is it put straight into a pension scheme? 

If it's paid in cash, could someone explain to me why the relief goes into different places, and if there are any implications for future tax returns - eg do I get even more relief if I transfer the higher rate portion back into my SIPP?

Any higher rate repayment from HMRC will be cash outside the pension.

The reason is that the 20% repayment to a pension is automatic for everyone even if they did not pay any tax.  So the pension company does not need to know your financial details to credit you with the 20%.  Calculating the higher rate relief will depend on your specific circumstances and so must be done by HMRC.

The way to look at it and not get confused is if you want a £X contribution to go into your pension you actually pay in 80% of £X. Then everything works out as expected.  It is much more difficult to understand what is happening if you start from the amount you personally are directly paying. 

Albermarle

WoodsPastor said:

NoMore said:

You get it back as cash (or possibly via a tax code change), People always seem to get confused about this, but the tax relief does end up in your pension, its just not as simple as the initial 20% tax relief.

You put £800 in and get 20% tax relief added to take it to £1000, but wait your a 40% tax payer so it should only be £600 to pay into a your pension to end up with £1000. So HMRC give you £200 in 'change' back so you now have effectively paid in £600 into the Pension and ended up with £1000 after the tax relief. 

You've put it really simply - thanks. So effectively I've overpaid up front. Thanks very much.

After the first year, HMRC will very likely adjust your tax code based on the assumption you will make similar contributions in the following year. In this case your will get a higher take home pay ( as paying less tax) but no rebate.
So you will not be overpaying upfront .

On you tax return you enter the gross contributions to the SIPP ( including the basic rate tax relief)