Reducing tax at higher rate throug SIPP contributions

Trevento

My projected income that will attract the higher rate tax for this tax year is £13,000. I'm would like to reduce the amount paid at higher rate (40%).

If I put in a lump sum of £24,000 into the relief at source SIPP, then will that reduce the income that attracts the higher rate tax by £4,800 (20% of £24,000) resulting in  £8,200 (£13,000 - £4,800) which I pay the higher rate on? Just want to check my logic is OK before moving rather a large sum.

I already pay £12,000 into the SIPP. Through my tax code this reduces the higher rate tax by £2,400. £36,000 is lower than both total income and lower than the £60,000 annual limit so I believe this is OK?

Marcon

Trevento said:

My projected income that will attract the higher rate tax for this tax year is £13,000. I'm would like to reduce the amount paid at higher rate (40%).

If I put in a lump sum of £24,000 into the relief at source SIPP, then will that reduce the income that attracts the higher rate tax by £4,800 (20% of £24,000) resulting in  £8,200 (£13,000 - £4,800) which I pay the higher rate on? Just want to check my logic is OK before moving rather a large sum.

I already pay £12,000 into the SIPP. Through my tax code this reduces the higher rate tax by £2,400. £36,000 is lower than both total income and lower than the £60,000 annual limit so I believe this is OK?

The limit applies to gross contributions, so you need to include basic rate tax relief - but you're still below the £60K annual limit if you make total contributions of £36K (provider claims basic rate, so grosses up to £45K).

NoMore

Marcon said:

Trevento said:

My projected income that will attract the higher rate tax for this tax year is £13,000. I'm would like to reduce the amount paid at higher rate (40%).

If I put in a lump sum of £24,000 into the relief at source SIPP, then will that reduce the income that attracts the higher rate tax by £4,800 (20% of £24,000) resulting in  £8,200 (£13,000 - £4,800) which I pay the higher rate on? Just want to check my logic is OK before moving rather a large sum.

I already pay £12,000 into the SIPP. Through my tax code this reduces the higher rate tax by £2,400. £36,000 is lower than both total income and lower than the £60,000 annual limit so I believe this is OK?

The limit applies to gross contributions, so you need to include basic rate tax relief - but you're still below the £60K annual limit if you make total contributions of £36K (provider claims basic rate, so grosses up to £45K).

Only if this is his only contributions to pensions. Employer contributions also count against the AA. No affect on the Tax relief limit of course. OP could well have no employer contributions as he may be self employed but we don't know that yet.

Marcon

NoMore said:

Marcon said:

Trevento said:

My projected income that will attract the higher rate tax for this tax year is £13,000. I'm would like to reduce the amount paid at higher rate (40%).

If I put in a lump sum of £24,000 into the relief at source SIPP, then will that reduce the income that attracts the higher rate tax by £4,800 (20% of £24,000) resulting in  £8,200 (£13,000 - £4,800) which I pay the higher rate on? Just want to check my logic is OK before moving rather a large sum.

I already pay £12,000 into the SIPP. Through my tax code this reduces the higher rate tax by £2,400. £36,000 is lower than both total income and lower than the £60,000 annual limit so I believe this is OK?

The limit applies to gross contributions, so you need to include basic rate tax relief - but you're still below the £60K annual limit if you make total contributions of £36K (provider claims basic rate, so grosses up to £45K).

Only if this is his only contributions to pensions. Employer contributions also count against the AA. No affect on the Tax relief limit of course. OP could well have no employer contributions as he may be self employed but we don't know that yet.

Fair comment and well worth adding to the thread. I was working on the fact it's a SIPP and OP refers to 'projected income' - not normally a term a salaried employee would use - and the fact there's no reference to employer contributions.

Trevento

It's just myself contributing to the SIPP. I do have a DB pension but it is salary sacrifice so I don't think that counts towards the Annual Allowance? It's £2.4K salary sacrifice so still beneath £60K if it did count.

Dazed_and_C0nfused

Trevento said:

My projected income that will attract the higher rate tax for this tax year is £13,000. I'm would like to reduce the amount paid at higher rate (40%).

If I put in a lump sum of £24,000 into the relief at source SIPP, then will that reduce the income that attracts the higher rate tax by £4,800 (20% of £24,000) resulting in  £8,200 (£13,000 - £4,800) which I pay the higher rate on? Just want to check my logic is OK before moving rather a large sum.

I already pay £12,000 into the SIPP. Through my tax code this reduces the higher rate tax by £2,400. £36,000 is lower than both total income and lower than the £60,000 annual limit so I believe this is OK?

That first sentence reads as though £13,000 of your income will be taxed at 40%.

But I'm struggling to understand the second paragraph.

If you pay a lump sum of £24,000 (inclusive of the basic rate relief) then that would increase your basic rate band by £24,000 meaning all of the £13,000 was taxed at 20% instead of 40%.  A personal tax saving of £2,600.  But there may be additional tax savings such as eligibility for Marriage Allowance or an increased savings nil rate band of £1,000.

But if you are already paying £12,000 then you won't be paying much higher rate tax in the first place so the personal tax saving on the additional £30k (gross) contribution will be only £200.

Or maybe I've misunderstood what you meant by the reference to a lump sum of £24k and already paying £12k 🤔

NoMore

Trevento said:

It's just myself contributing to the SIPP. I do have a DB pension but it is salary sacrifice so I don't think that counts towards the Annual Allowance? It's £2.4K salary sacrifice so still beneath £60K if it did count.

I'm afraid it does, but as a DB scheme its not the contributions that count but the increase in value of the benefits, this is known as the Pension Input Amount. Your scheme admin should be bale to provide you with this number, although its often until not until late into the tax year before you get it for the current year.

Trevento

Dazed_and_C0nfused said:

Trevento said:

My projected income that will attract the higher rate tax for this tax year is £13,000. I'm would like to reduce the amount paid at higher rate (40%).

If I put in a lump sum of £24,000 into the relief at source SIPP, then will that reduce the income that attracts the higher rate tax by £4,800 (20% of £24,000) resulting in  £8,200 (£13,000 - £4,800) which I pay the higher rate on? Just want to check my logic is OK before moving rather a large sum.

I already pay £12,000 into the SIPP. Through my tax code this reduces the higher rate tax by £2,400. £36,000 is lower than both total income and lower than the £60,000 annual limit so I believe this is OK?

That first sentence reads as though £13,000 of your income will be taxed at 40%.

But I'm struggling to understand the second paragraph.

If you pay a lump sum of £24,000 (inclusive of the basic rate relief) then that would increase your basic rate band by £24,000 meaning all of the £13,000 was taxed at 20% instead of 40%.  A personal tax saving of £2,600.  But there may be additional tax savings such as eligibility for Marriage Allowance or an increased savings nil rate band of £1,000.

But if you are already paying £12,000 then you won't be paying much higher rate tax in the first place so the personal tax saving on the additional £30k (gross) contribution will be only £200.

Or maybe I've misunderstood what you meant by the reference to a lump sum of £24k and already paying £12k 🤔

Thanks, I'll rephrase to make a bit clearer.

My salary will be just under £88K this tax year. Tax code is 1875L. My estimated basic rate tax is £7.5K and higher rate tax is £13K. I contribute £12K to a SIPP which reclaims tax at source. I would like to make an additional lump sum payment of £24K which is currently in a savings account into the SIPP to reduce the amount of higher rate tax.

The question is will that reduce the income that attracts the higher rate tax by £4.8K (20% of £24K)? Which would leave £8.2K which would attract higher rate tax?

Thanks to others who have clarified question about annual allowance.

Dazed_and_C0nfused

Trevento said:

Dazed_and_C0nfused said:

Trevento said:

My projected income that will attract the higher rate tax for this tax year is £13,000. I'm would like to reduce the amount paid at higher rate (40%).

If I put in a lump sum of £24,000 into the relief at source SIPP, then will that reduce the income that attracts the higher rate tax by £4,800 (20% of £24,000) resulting in  £8,200 (£13,000 - £4,800) which I pay the higher rate on? Just want to check my logic is OK before moving rather a large sum.

I already pay £12,000 into the SIPP. Through my tax code this reduces the higher rate tax by £2,400. £36,000 is lower than both total income and lower than the £60,000 annual limit so I believe this is OK?

That first sentence reads as though £13,000 of your income will be taxed at 40%.

But I'm struggling to understand the second paragraph.

If you pay a lump sum of £24,000 (inclusive of the basic rate relief) then that would increase your basic rate band by £24,000 meaning all of the £13,000 was taxed at 20% instead of 40%.  A personal tax saving of £2,600.  But there may be additional tax savings such as eligibility for Marriage Allowance or an increased savings nil rate band of £1,000.

But if you are already paying £12,000 then you won't be paying much higher rate tax in the first place so the personal tax saving on the additional £30k (gross) contribution will be only £200.

Or maybe I've misunderstood what you meant by the reference to a lump sum of £24k and already paying £12k 🤔

Thanks, I'll rephrase to make a bit clearer.

My salary will be just under £88K this tax year. Tax code is 1875L. My estimated basic rate tax is £7.5K and higher rate tax is £13K. I contribute £12K to a SIPP which reclaims tax at source. I would like to make an additional lump sum payment of £24K which is currently in a savings account into the SIPP to reduce the amount of higher rate tax.

The question is will that reduce the income that attracts the higher rate tax by £4.8K (20% of £24K)? Which would leave £8.2K which would attract higher rate tax?

Thanks to others who have clarified question about annual allowance.

Assuming that,

both £12k and £24k figures are the gross contributions inclusive of the basic rate tax relief the pension company add and

£88k is taxable pay (the amount that will be shown on your P60) then,

You will still have a small higher rate liability and the £36k RAS contributions will reduce your personal tax liability by £7,200.

I'm lost as to where you are getting this from?

Which would leave £8.2K which would attract higher rate tax?

Your basic rate band will become £73,700 so on taxable earnings of £88,000 there will be just £1,730 liable at 40%.

stueyhants

You need to check the PIA for the DB scheme. I have similar numbers to you and due to the higher than normal inflation figures over the past couple of years it’s really affected the PIA to the point where I have bust the Annual allowance and now owe additional tax. I will be getting that all back this year with the increase to 60k 😊

xylophone

https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/pension-contributions-qa

Q: My client is an active member of his employer’s defined benefit pension scheme. He also wants to make a personal pension contribution. How do I calculate the maximum personal contribution allowed for tax relief? He has a pensionable salary of £57,500 and pays 3% employee contribution.

A: Calculation one – tax relief

The client already pays £1,725 to the DB scheme therefore, to be eligible for tax relief, he can only pay up to a maximum of (£57,500 - £1,725) £55,775 gross to a personal pension plan.

Calculation two – annual allowance

His DB pension input amount for the current pension input period is estimated at approximately £11,000. He has fully used his annual allowance for previous years so has no carry forward available.

Therefore, available annual allowance is £60,000 less the DB pension input amount for the current tax year of £11,000 leaving £49,000.

Comparison

The remaining annual allowance is 49,000 ie less than £55,775. This means your client could pay up to £55,775 and receive tax relief on the whole amount. However, you know that his total pension savings would then exceed his available annual allowance (he has no carry forward) and he would have to report the excess of £6,775 (55,775 - 49,000) and declare the related tax charge. An AA excess/ charge reduces the tax efficiency of making this level of personal contribution.

In this scenario it may be more appropriate to limit the individual pension contribution to £49,000 gross as this will receive tax relief without causing any annual allowance excess.

As always, there will be exceptions to the rule. There may still be a net overall benefit for an individual to pay a personal contribution that actually causes them to have an annual allowance excess. This would be the case if the individual wanted to pay a larger pension contribution to get them out of the child benefit or personal allowance tax traps, or to reduce their threshold income to avoid a tapered annual allowance etc.