SIPP, MPAA and 40% tax?

CloesUnc

Good evening everyone,

I am 55 years old and I first accessed my SIPP earlier this financial year, triggering MPAA via drawdown.

I am also expecting a payment from my previous employer before the end of the financial year, which will push me into the 40% tax bracket by about (by my reckoning) £4000 worth of tax.

Now, I have earned enough money this year to pay £10000 (the amount of the MPAA) into my SIPP. However, I wouild please just like some assistance concerning how this would work. 

My thinking is that:

1. If I pay in £6000 to my SIPP, this is equivalent to £10000 gross at the 40% rate. I'm with HL for my SIPP, and as I understand it they would uplift my £6000 to £7500.

2. I then inform HMRC of my pension contribution in my tax return next financial year, and I would get the other "20%" back via a payment to my bank (?). 

However, in this case I would NOT have paid £10000 into my SIPP! 

I guess I'm struggling with the fact that a SIPP payment is "grossed" up, but I'm not clear how the 40% tax is handled to allow me to use the full £10k allowance in this case. I certainly don't want to go over the limit and incur a tax charge.

Thank you for any assistance in this. 

Nebulous2

You pay £8000 in, it gets grossed up with tax relief to £10000. 

The tax relief as a higher rate tax payer goes to you direct, as you've said, and isn't part of your pension contribution. 

jamesd

25% is added by HL to gross up. You tell HMRC that gross and they increase your basic rate band by it. So pay in £8k & tell HMRC 10k. HL will add the £2k late in the month after the one when you made the contribution.

CloesUnc

Aha! Thanks very much, yes that does make sense now that I see it written down!

Much appreciated both!

Dazed_and_C0nfused

There is no "other 20%".

The Personal tax saving you will make depends on the specifics of your personal tax situation.

It might be worth 20%.  Or 0%.  Or 60%+.

What you can be certain of is that if you contribute £8k net then the pension company will add £2k in pension tax relief giving you £10k in your pension fund.

And if you notify HMRC if the £10k RAS contribution they will give you a basic rate band of £47,700 instead of £37,700.  The tax savings from this will depend on what your taxable income and what type of income it is.