Paying into a SIPP to avoid High Income Child Benefit Charge

NewBlock56

Hello All,

My wife is due to give birth in October (first child).

With bonuses I earn over £60k so we will have to pay the Child Benefit back, but I am looking to pay extra into a SIPP and / or my work pension to avoid this

My question is about the higher rate tax relief when paying into a SIPP, and how and when you get this relief

For example if I earn £65k I need to pay £15k into a SIPP but I now only have £9k as I have paid income tax

If I put that into a SIPP I understand you automatically get the relief for basic tax rate so it becomes £11,250

But what happens with the remaining relief. Does this go directly into the pension pot from HMRC, or do they pay it to me as a cheque?

I have not done self assessment before so it's making me scratch my head a bit

Thank you

Dazed_and_C0nfused

Any additional relief (which is not a fixed 20%) benefits you, it doesn't get added to your pension.

You could get some provisional relief by requesting a tax code adjustment but ultimately it will be finalised via your Self Assessment return.

If you are due a refund then a cheque is unlikely to be issued, bank transfer is the usual way for HMRC to pay a Self Assessment refund.

Pat38493

Probably it will be more convenient to do this by increasing your employee pension contributions, unless there is some specific reason not to do it that way.  With doing that, all of the tax relief will find its way into the pension.

Marcon

Pat38493 said:

Probably it will be more convenient to do this by increasing your employee pension contributions, unless there is some specific reason not to do it that way.  With doing that, all of the tax relief will find its way into the pension.

Only if the workplace pension uses the 'net pay' arrangement (confusing name, since contributions are deducted from gross pay before tax is applied) rather than 'relief at source' (contributions paid from taxed pay).

OP, does your employer offer salary sacrifice? If not, worth discussing with them, since that would give you automatic tax relief at your marginal rate and there's an NI saving for both you and your employer.

NewBlock56

Marcon said:

Pat38493 said:

Probably it will be more convenient to do this by increasing your employee pension contributions, unless there is some specific reason not to do it that way.  With doing that, all of the tax relief will find its way into the pension.

Only if the workplace pension uses the 'net pay' arrangement (confusing name, since contributions are deducted from gross pay before tax is applied) rather than 'relief at source' (contributions paid from taxed pay).

OP, does your employer offer salary sacrifice? If not, worth discussing with them, since that would give you automatic tax relief at your marginal rate and there's an NI saving for both you and your employer.

Thank you for the replies.

My current pension is salary sacrifice so I can increase that, which I probably will, however I am only allowed to change it once per year, in april, and can only contribute whole percentages of my pay

Added to this, the bonuses are highly variable so I think I may need the flexibility of a SIPP as well?

Dazed_and_C0nfused

NewBlock56 said:

Marcon said:

Pat38493 said:

Probably it will be more convenient to do this by increasing your employee pension contributions, unless there is some specific reason not to do it that way.  With doing that, all of the tax relief will find its way into the pension.

Only if the workplace pension uses the 'net pay' arrangement (confusing name, since contributions are deducted from gross pay before tax is applied) rather than 'relief at source' (contributions paid from taxed pay).

OP, does your employer offer salary sacrifice? If not, worth discussing with them, since that would give you automatic tax relief at your marginal rate and there's an NI saving for both you and your employer.

Thank you for the replies.

My current pension is salary sacrifice so I can increase that, which I probably will, however I am only allowed to change it once per year, in april, and can only contribute whole percentages of my pay

Added to this, the bonuses are highly variable so I think I may need the flexibility of a SIPP as well?

Ignoring HICBC then salary sacrifice usually has the advantage of 20% tax and 12% NI saving or 40% tax and 2% NI savings so slightly better than relief at source so maybe best not to underplay the salary sacrifice element.

r6mile

My suggestion would be to amend your pension contributions to roughly get to the 50k ANI.  And then at the end of the tax year you make a (small) SIPP contribution if required.This has the advantage that you are not chasing HMRC for large sums of tax relief, that are also more likely to get caught up in extra checks etc.

For 22/23 I made a 6250 (gross) contribution to my personal pension, and over three months later I am still waiting for the 1.5k ish tax refund which has been caught in extra checks etc. nightmare!

For 23/24 I have simply amended my workplace contributions (net pay) so as to get to an estimated 50k ANI. If I need to my workplace pension allows lump sums directly to the pension company (L&G - which I will do if required. But the sums to chase HMRC will be smaller!

NewBlock56

Reading into this a bit more it seems like the "Adjusted Net Income" used to determine the higher benefit charge is calculated using the "grossed-up" amount you have paid into a pension, as long as the provider adds basic rate relief

So for £15k I would need to put £12k into the SIPP

The example I found is here https:// www.gov.uk /guidance/adjusted-net-income

(I can't post the link directly as I am new)

Thanks all for your answers

r6mile

Yes that’s right - the 12k (net) would be immediately topped up to 15k (gross).

You’d then need to contact HMRC to get the 3k higher rate relief.

Keep in mind though that your workplace pension contributions have already reduced your ANI. So if your gross salary is 65k, but you already contribute say 5k to your pension, then your ANI is 60k so you need to contribute an extra 10k (gross).

One thing I’d say though is only so this if you can afford it - I have 3 kids so my “marginal rate” post 50k is around 70% so I see it as a no brainer to get ANI down (as it also gets me marriage allowance as my wife is a low earned).

With 1 child it’s more like 52% - obviously still very beneficial for a pension if you can afford it but I guess less if a slam dunk from my POV.

RogerPensionGuy

NewBlock56 said:

Marcon said:

Pat38493 said:

Probably it will be more convenient to do this by increasing your employee pension contributions, unless there is some specific reason not to do it that way.  With doing that, all of the tax relief will find its way into the pension.

Only if the workplace pension uses the 'net pay' arrangement (confusing name, since contributions are deducted from gross pay before tax is applied) rather than 'relief at source' (contributions paid from taxed pay).

OP, does your employer offer salary sacrifice? If not, worth discussing with them, since that would give you automatic tax relief at your marginal rate and there's an NI saving for both you and your employer.

Thank you for the replies.

My current pension is salary sacrifice so I can increase that, which I probably will, however I am only allowed to change it once per year, in april, and can only contribute whole percentages of my pay

Added to this, the bonuses are highly variable so I think I may need the flexibility of a SIPP as well?

Some pensions allow various changes for so called life events, for example I've known people reduce or stop pension inputs when in financial stress and likewise increase for various reasons.

Some smart schemes allow regular payments and so called one off payments that can be adjusted monthly, but need to check one off payments are still smart payments. 

Maybe change X pounds per month to % per month and this will help keeping any trim line desired. 

Maybe see if bonuses can be paid in to pension in a smart fashion.