SIPP payments & tax implications

Archerychick

Good morning! 

I am currently doing some financial planning due to a promotion at work, which will increase my income quite substantially. 

At the moment I’m managing well to keep below the 40% tax band through making additional pension payments via work place pension which is salary sacrifice into Royal London.

I’ve modelled out what the next 3 years looks like to make the most of all my tax free allowances and to also make use of pension allowances I’ve not used in the last three years before they’re gone. I believe that I can still keep my taxable income below the 40% level, and hold less than £20 a year in taxable cash savings to stay within the £1k PSA. From the next tax year I will use all of the current £60k PA allowance.

Because of some unused pension allowances, I have the opportunity to take some funds out of savings and push into a pension, and I’m thinking of setting up a SIPP as it would be easier to manage I think (unless there’s a substantial benefit to putting into my WP with royal London)

I know that I would get tax relief on that payment but I just want to check that there aren’t any other tax implications with doing this that I need to factor in?

Thank you!

Dazed_and_C0nfused

Probably the main thing you need to understand is that salary sacrifice and RAS (relief at source) contributions work in completely different ways.

With salary sacrifice you don't receive any pension tax relief as you aren't making the contributions, you are agreeing to a reduced salary in return for employer pension contributions.

For example if your salary is say £75k and you sacrifice £15k then £15k gets added to your pension fund with no tax relief and your taxable income will be £60k (taxable pay shown on your P60).

With RAS contributions the pension provider will add 25% to each qualifying contribution you make but those contributions don't reduce your taxable income.  They do increase your basic rate band though.

For example if you add £15k then the pension company will add £3.75k to your pension fund so you have a gross contributions of £18.75k.  But using, the original example, your taxable pay would be £75k.  Your basic rate band would be £56,450 though.

RAS contributions also reduce your adjusted net income, useful if either HICBC or tapered Personal Allowance are factors for you.

You may find some salary sacrifice and some RAS contributions are worth considering although for most people salary sacrifice is the better option as you usually* avoid paying tax and NI on the amount sacrificed.
*if you are a lower earner you might not be paying tax and NI on the amount sacrificed so RAS contributions can be a better option but that doesn't apply to many people.

Archerychick

Thank you! I understand the difference between the two, but I can’t use salary sacrifice to move funds from savings (e.g. funds I’ve already paid tax and NI on through payroll) into a pension. So I think to do this, setting up a SIPP would be my most straight forward option. 

So let’s say I want to move £30k, if I do that I’ll get tax relief added to my SIPP pension by my provider, and my basic rate band would increase (didnt know this latter part!)? This latter part I’m not following in your example though and how you got to £56,450 from a £15k contribution - would you mind expanding please? Thank you!

Albermarle

You could salsac more and use the savings to live off?

QrizB

Archerychick said:

Thank you! I understand the difference between the two, but I can’t use salary sacrifice to move funds from savings (e.g. funds I’ve already paid tax and NI on through payroll) into a pension.

You sort-of can by sacrificing more salary then spending your savings on day-to-day living to make up the shortfall in take-home pay.

Archerychick

Ok that’s an interesting approach. I’d need to do that slower rather than say a £30k lump sum I’d guess because work couldn’t reduce my take home pay below the minimum wage. I’ll discuss with work what they need from me for the additional payments.

Dazed_and_C0nfused

Archerychick said:

Thank you! I understand the difference between the two, but I can’t use salary sacrifice to move funds from savings (e.g. funds I’ve already paid tax and NI on through payroll) into a pension. So I think to do this, setting up a SIPP would be my most straight forward option. 

So let’s say I want to move £30k, if I do that I’ll get tax relief added to my SIPP pension by my provider, and my basic rate band would increase (didnt know this latter part!)? This latter part I’m not following in your example though and how you got to £56,450 from a £15k contribution - would you mind expanding please? Thank you!

£56,450 is the standard basic rate band of £37,700 plus the extension due from a RAS contribution of £18,750.

£37,700 + £18,750 = £56,450

af1963

Also no reason why you can't do as much as possible using salary sacrifice to min wage level, and then if you have more funds available that you'd like to get in a pension, use a SIPP for that.  You could put up to your full ( after-sacrifice) salary into the SIPP (paying in 80% of the amount yourself, and getting it topped up with tax relief.

Taking the money out of savings and in to a SIPP does tie it up until you're old enough to withdraw from the SIPP, so if you think you may need it sooner, you'd have to factor that in too. 

Secret2ndAccount

If you pay 30k into a SIPP, the SIPP provider will claim 7,500 tax relief and add it to the 30k (think 20% of 37,500). HMRC will also add 7,500 to your tax thresholds. So, assuming you earn enough, 7,500 will go from being taxed at 40% to being taxed at 20%. You get your full 40% relief, but half of it goes into your pension, and half of it goes into your pocket.
The greatest benefit comes from Salary Sacrifice, but if you need to get this done before April, and your payroll doesn't want to constantly change your sacrifice amounts, it's fine to pay into a SIPP. For a higher rate taxpayer the saving from SalSac might be 42% including NI, compared to 40% into the SIPP, so not life-changing. The company is saving NI too, and some of them contribute a portion of their saving into your pension. This would tip the scales a little more in favour of SalSac

Archerychick

This is really helpful thank you!

jamesd

When I wanted to move money from non-pension to pension I raised my salary sacrifice to do it, cutting pay to a couple of percent over minimum wage.

Salary sacrifice NI saving is calculated for each pay period, not annually. This means it's better to concentrate it into as few months as possible so you get the 12% employee NI saving on as much of the money as possible.

If you want.to keep it constant for a year it's best to mix high and low years. Down to minimum wage some years and less as needed in others.

Your employee may have sacrifice limits. Mine had 50% of pay plus the matched amount but would remove the limit if you explained why. The limit was there just to protect against mistakes.

Some employers share part of all of their own NI saving.

Royal London might not have great investments and if if doesn't meet your needs you can look at transferring occasionally