How much to contribute to SIPP?

Cheese_Ham_Sandwich

Hello all, looking for some guidance please about SIPP contributions.

I am employed, my annual salary is £70,000. About £68,000 taxable once my workplace pension contributions are accounted for. I don’t currently have any salary sacrifice schemes. I am seeking to reduce my taxable salary to £50,000 in order to both keep all of my child benefit payments and to maximise tax relief on pension contributions.

I am confused by how much to contribute myself to my SIPP to get to £50,000 taxable earnings.

Do I contribute £14,400 which is grossed up to £18,000. Then claim back the extra on my tax return?
Or do I contribute less given I ultimately get 40% tax relief on this contribution?

Thanks very much

Dazed_and_C0nfused

Cheese_Ham_Sandwich said:

Hello all, looking for some guidance please about SIPP contributions.

I am employed, my annual salary is £70,000. About £68,000 taxable once my workplace pension contributions are accounted for. I don’t currently have any salary sacrifice schemes. I am seeking to reduce my taxable salary to £50,000 in order to both keep all of my child benefit payments and to maximise tax relief on pension contributions.

I am confused by how much to contribute myself to my SIPP to get to £50,000 taxable earnings.

Do I contribute £14,400 which is grossed up to £18,000. Then claim back the extra on my tax return?
Or do I contribute less given I ultimately get 40% tax relief on this contribution?

Thanks very much

You can't reduce your taxable income by contributing to a SIPP.

HICBC isn't based on your taxable income, it's adjusted net income which counts.  And RAS contributions to a SIPP would reduce your adjusted net income.

If you want to reduce your adjusted net income by £18,000 then you would contribute £14,400 with the pension company adding 25% to make a gross contribution of £18,000.

Unless you are Scottish resident though you won't get 40% relief on the whole of that £18,000 as you aren't paying higher rate tax on £18,000.  It may well be quite close but higher rate tax only gets charged above £50,270.

Any higher rate tax relief benefits you personally, it doesn't get added or your pension fund.

When calculating your adjusted net income don't forget all taxable income has to be factored in, even (non ISA) interest or dividends taxed at 0%.

xylophone

https://www.gov.uk/child-benefit-tax-calculator

https://adviser.royallondon.com/technical-central/pensions/state-benefits-pension-manuals/child-benefit-avoiding-the-tax-charge/

https://www.thetimes.co.uk/money-mentor/answer/high-income-child-benefit-charge-avoid/#:~:text=That's because the cap is,or eliminate the HICBC altogether.

https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/reduce-high-income-child-benefit-charge

Pat38493

Do you have the option to increase your workplace contributions to achieve the same objective and if so have you investigated this approach?

Albermarle

Pat38493 said:

Do you have the option to increase your workplace contributions to achieve the same objective and if so have you investigated this approach?

As above - this is often a better or at least viable alternative to having a  separate pension.

OP - You say your employer does not operate a salary sacrifice system for pension contributions ( which is a bit daft for them really). However there still two other different ways for contributions to be taken from your salary.
Relief at source - After tax 
Net pay - Before tax is taken.

Do you know which one it is ?

Cheese_Ham_Sandwich

Thank you all for the clear advice.

My workplace pension is 'Now Pensions' scheme which operates net pay.

Is there a benefit to using my workplace pension rather than paying into my own SIPP from a tax point of view?
Last time I checked Now Pensions their performance was pretty poor. No fund selection possible.

Dazed_and_C0nfused

Cheese_Ham_Sandwich said:

Thank you all for the clear advice.

My workplace pension is 'Now Pensions' scheme which operates net pay.

Is there a benefit to using my workplace pension rather than paying into my own SIPP from a tax point of view?
Last time I checked Now Pensions their performance was pretty poor. No fund selection possible.

Net pay is much simpler to manage, basically you don't have to do anything as the correct tax relief (in all situations) is given immediately by your taxable pay being reduced.

For example £70k salary and £20k net pay contribution = £50k taxable pay.

Nothing to claim from HMRC and nothing to enter on a tax return (if you complete one).

But if you're not happy with the pension itself a separate scheme might be the better option. 

That will just be more work tax wise as you would be making RAS contributions and would need to sort any higher rate relief our with HMRC.

Your taxable income would remain £70k but the gross RAS contribution would increase the amount of basic rate tax you can pay.  Which in turn reduces the higher rate tax payable.

Albermarle

Cheese_Ham_Sandwich said:

Thank you all for the clear advice.

My workplace pension is 'Now Pensions' scheme which operates net pay.

Is there a benefit to using my workplace pension rather than paying into my own SIPP from a tax point of view?
Last time I checked Now Pensions their performance was pretty poor. No fund selection possible.

Now are unusual in only offering one fund.
A lot of choice can be confusing for most people, but having no alternative at all is not great .

Pat38493

Cheese_Ham_Sandwich said:

Thank you all for the clear advice.

My workplace pension is 'Now Pensions' scheme which operates net pay.

Is there a benefit to using my workplace pension rather than paying into my own SIPP from a tax point of view?
Last time I checked Now Pensions their performance was pretty poor. No fund selection possible.

I guess the benefit is in the convenience of not having to faff about with relcaiming tax, making sure you get all the tax relief etc.

If your employer is willing to match your contributions to any higher level you should for sure do that, but seems unlikely given that they have seemingly chosen the cheapest possible option.

However if the fund your workplace is in doesn't have any decent funds to invest in, that could indeed be a reason to go elsewhere.  Worth noting as well that although I am not sure of the details of the Now fund, many funds have not done well over the last 2 years or so as compared to the prior 8-10 years.  This is kind of normal as long term investments are expected to have bad years.  

Albermarle

 Worth noting as well that although I am not sure of the details of the Now fund, many funds have not done well over the last 2 years or so as compared to the prior 8-10 years.

Annualised growth of the Diversified Growth fund ( The one you are in 100%  until 15 years before retirement, then it starts to be diluted) Currently 56% equity.

Over 5 years - 2.6% pa ; Over 3 years - 3.2% pa ; Over one year - 2.5%

Compared to similar medium risk funds with similar equity % like  Vanguard Life strategy 60, or HSBC Global Strategy Balanced , it is a very similar performance.