Can non-taxpayer contribute more than £2880?

MrBadger1969

Hi everyone. I'm wanting to understand more about non taxpayers contributing £2880 (or more) to a SIPP before chatting to my brother-in-law. BiL (aged 52) is not currently working, has zero income and no benefits, and is living off savings from previous employment. He has no pension provision at the moment, and I think it would be a good idea for him to contribute £2880 per year to a Sipp to gain the additional £720 from the taxman. He could then draw out the £3600 tax free or leave it invested as he wishes, which would easily beat the high street savings accounts that he's currently using.

Q. What would be the position if he were to contribute more than £2880? I assume that the Sipp provider would claim just £720, and any contributions over £2880 would not attract any other tax benefit or liability? I assume that any excess money in goes in tax free, and then can be withdrawn tax free, as long as he remains a non taxpayer? Correct?

I think that the only benefit to him contributing more than £2880 would be if he were to start working again, where savings interest would be taxed at 20%, but UFPLS would be taxed at an effective 15%.

Is there anything that I'm missing? 

Thanks, 
Badger

NoMore

Yes he would get no tax relief on money above the 2880 as he has no relevant earnings, it can also be quite hard to do this in pensions, as not many pensions are set up to take personal contributions and not claim the tax relief on it.

As far as I can see, there is zero advantage to put in more than £2880 unless there is relevant earnings to get more tax relief.

Albermarle

What would be the position if he were to contribute more than £2880? I assume that the Sipp provider would claim just £720, and any contributions over £2880 would not attract any other tax benefit or liability?

The SIPP provider has no info on its customers earnings, so just automatically adds 25% to all contributions.

It is up to the contributor not to add more than they are entitled to. If your BIL added more than £2880 and gained tax relief they were not entitled to they would have to pay it back at some point . Also unwinding these issues can get messy. So he should not do it.

would be if he were to start working again, where savings interest would be taxed at 20%, 

Only if his employment and interest earnings were high enough. In any case he can add £20K a year to a cash ISA and pay no tax on that interest.

Secret2ndAccount

BiL can't draw any money out of a SIPP until he is 57 (possibly 55)
There is no benefit to paying in more than 2880
Some pension providers are not really set up to deal with excess contributions. What might happen:
1. You tell them what you are doing and it all goes smoothly. Put in 5,000 2880 gets 720 added. The rest just sits there
2. You tell them what you are doing. They send back everything above 2880 that you try to contribute
3. You don't tell them what you are doing. They claim tax relief on all 5,000. You get a letter from HMRC next year, and now have to try to unwind the transaction.

Even in case 1, there is nothing to gain. At best, he gets the extra money back without paying tax on it. At worst, he pays 15% tax on it. If he had just kept it in the bank, he would have paid 0% tax, so that would be a 15% loss.
If he wants to invest the money, he should put it in an ISA. You can invest in stocks and shares, or just hold cash in an ISA, and it's usually free or cheap. Pensions charge an admin fee - typically more than an ISA. So, unless he's already putting away 20k/yr, ISA is the way to go.

There are some rare cases where it's worth considering overpaying into a SIPP. Most of the time it's a bad idea.

af1963

The SIPP provider won't know how much he may have earned, so would claim tax relief on the full amount he pays in. He'd need to correct this later with HMRC.

No real advantage to putting more in a pension anyway without getting tax relief.   Putting it in a SIPP, three quarters of any withdrawal would be taxed again. If he put the extra into an ISA instead, any interest would be tax free.

There's also a 0% band for taxable (non-ISA) savings interest which can cover several thousand pounds; the exact amount available depends on other earnings, reducing as you earn more.

sheslookinhot

Secret2ndAccount said:

BiL can't draw any money out of a SIPP until he is 57 (possibly 55)
There is no benefit to paying in more than 2880
Some pension providers are not really set up to deal with excess contributions. What might happen:
1. You tell them what you are doing and it all goes smoothly. Put in 5,000 2880 gets 720 added. The rest just sits there
2. You tell them what you are doing. They send back everything above 2880 that you try to contribute
3. You don't tell them what you are doing. They claim tax relief on all 5,000. You get a letter from HMRC next year, and now have to try to unwind the transaction.

Even in case 1, there is nothing to gain. At best, he gets the extra money back without paying tax on it. At worst, he pays 15% tax on it. If he had just kept it in the bank, he would have paid 0% tax, so that would be a 15% loss.
If he wants to invest the money, he should put it in an ISA. You can invest in stocks and shares, or just hold cash in an ISA, and it's usually free or cheap. Pensions charge an admin fee - typically more than an ISA. So, unless he's already putting away 20k/yr, ISA is the way to go.

There are some rare cases where it's worth considering overpaying into a SIPP. Most of the time it's a bad idea.

Yep. The OP. should also be aware that each of the 3 options quoted causes needless work for HMRC staff, whilst genuine queries are not being answered.

Marcon

MrBadger1969 said:

I think it would be a good idea for him to contribute £2880 per year to a Sipp to gain the additional £720 from the taxman. He could then draw out the £3600 tax free or leave it invested as he wishes, which would easily beat the high street savings accounts that he's currently using.

Given he has no income at present and can't access pension savings for at least another 3 years, is it realistic to put a hefty chunk of his savings into a SIPP? I'm sure your intentions are good, but are they also realistic, given his current situation and your reference to 'were he to start working again...'.

molerat

Hi everyone. I'm wanting to understand more about non taxpayers contributing £2880 (or more) to a SIPP

Don't confuse non taxpayers and non earners.  A non earner can contribute £3600 gross, £2880 net.  A non tax payer may be able to contribute £10056 net, topped up to £12570 gross with £2514 tax relief, if they were earning £12570 even though they would not be paying any tax.

MrBadger1969

Thanks to all for your very helpful replies. I thought that >£2880 could cause no end of confusion, but I wanted to test the water with you knowledgeable types!

BiL will hit 55 in June 2026, before the increase in the minimum pension age, so 2.5 years from now. I think he's put money in 1-year fixes with living expenses in instant access accounts, so he may not be put off by a 2.5 year timescale to get a >25% return in 2.5 years on 4 lots of 2880 if he starts this tax year.

MrBadger1969

molerat said:

Hi everyone. I'm wanting to understand more about non taxpayers contributing £2880 (or more) to a SIPP

Don't confuse non taxpayers and non earners.  A non earner can contribute £3600 gross, £2880 net.  A non tax payer may be able to contribute £10056 net, topped up to £12570 gross with £2514 tax relief, if they were earning £12570 even though they would not be paying any tax.

@molerat - you are quite right of course. My sloppy language. I meant the latter. 

MrBadger1969

@sheslookinhot - that's exactly what I'm trying to avoid! I thought that £2880 should be the max, confirmed by the hive mind.