SIPP contributions to avoid 40% band / HICB charge

PloughmansLunch

Hello all,

I'm trying to work out how much of a lump sum to put into my SIPP in the next few days to reduce my tax when I next fill in my self assessment as I do some freelance work in addition to my day job (£xxxx taxable pay after LGPS & AVCs).

For the first time, even after deducting some work expenses from the freelance income, I'm into the 40% band, so can somebody please have a look through the figures below and see if I've worked it out correctly, or if I'm miles out? I've never done this before but I'd like to avoid paying more tax than I need, and also retain child benefit if possible.

Summary of Calculation for 6 April 2023 to 5 April 2024

Income
Total earnings before Tax taken off
£xxxx

Total interest paid by a UK bank or building society
(before Tax is taken off)
£xxxx

Total Income
£xxxx

less Personal Allowance(s)
Personal Allowance     
£xxx

Total Allowance(s)            
£xxxx

Income on which Tax is due          
£xxxx

How your Income Tax has been calculated

Taxable employment income
£xxxx @ 20 % = £xxxx
£xxxx @ 40 % = £xxxx
£0.00 @ 45 % = £0.00

Taxable interest paid by a UK bank or building society
£0.00 @ 0 % = £0.00
£xxxx @ 20 % = £xxxx
£xxxx @ 40 % = £xxxx

Taxable Income
£xxxx

Income Tax due
£xxxx

less tax already taken off

Tax paid on earnings
£xxxx 

Tax paid on UK bank or building society interest
£0.00 

Total tax already taken off
£xxxx

 −−-−−−−−−

Already paid into SIPP this year
£xxxx (£xxxx GROSS)

Am I right in thinking that as long as I pay another £xxxx gross (£xxxx net) into my SIPP everything will be hunky-dory, and apart from an extra N.I. contribution for freelance work, I'll only have to pay 20% tax on interest and additional earnings? Or have I over/under calculated?

I deffo don't want to just miss the threshold for the sake of a couple of hundred pounds, so don't mind overpaying a bit into the SIPP if need be. 

Thanks in advance for any help or pointers - the more I look at it the more confused I get.

EDIT: To remove info

Sarahspangles

I don’t think it works quite like that. You get a Personal Savings Allowance of £1000 and then pay 20% on everything above that.  If you do become a higher rate taxpayer your allowance falls to £500. It’s not simply added to your taxable income.

PloughmansLunch

Oh, the above was copy/pasted from an online HMRC calculator, but yes, the PSA appears to be incorrect in my example and not properly taken into account.

My understanding is if including interest my taxable income was say £50281, then £11 of income would be in the 40% tax bracket, but if I paid £8 into a SIPP the same year I could get £2 tax relief and further tax relief on self-assessment, bringing me back within the basic rate tax band and reverting to the £1k PSA, and negating any potential HICB charges. If this understanding is correct, I still have no idea how much I'd need to contribute.

Sarahspangles

You need to increase your Personal Allowance to 13190 (HMRC leave off the final 0).

I think your workings are fine but as you’re not on the standard Personal Allowance is there scope for there to be more adjustments that affect how much you get tax free? Sorry I’m asking rather than answering. You should have the information on a notice of coding or in the HMRC app

PloughmansLunch

Wouldn’t the tax relief from additional SIPP contributions (via self assessment) effectively increase my basic rate band so I don’t have to pay the currently due 40% rate? Maybe I’m misunderstanding how that works. 

I would normally fiddle around with the HMRC self assessment form to see various outcomes, but I don’t want to risk fudging the live return I’ve already submitted a few months ago for the previous year. 

Dazed_and_C0nfused

There are a few things you need to tweak.

Firstly you look at your liability ignoring the savings nil rate band (aka Personal Savings Allowance).  If you are a higher rate payer then your savings nil rate band is £500.

If you have any basic rate band left after the non savings non dividend income is taxed (like in your example) then the savings nil rate band uses that first.  You don't seem to have included this £500 in your calculation.

You cannot have a Personal Allowance greater than £12,570.  But depending on how your tax code is calculated there might be other things to factor in such as job expenses.

RAS pension contributions do increase your basic rate band, that is how any higher rate relief due is given.

But you have ~£19k taxed at 40% I'm not sure why you think a total of £7,723 gross RAS pension contributions would stop you from being a higher rate payer 🤔

You seem to be getting mixed up between the amount of income taxed at 40% and the amount of 40% tax that is payable.

PloughmansLunch

I think I have done some very backwards maths deducting the £12570 personal allowance from the £69k total leaving ~£7k above the basic rate threshold, without taking into account that I’d need the personal allowance as a starting point, so actually accidentally doubling the PA. It’s been a very long week for me. I normally have to do self assessment anyway due to savings, but have always previously still been in the basic rate band.

So to eliminate the amount of 40% tax payable and keep full child benefit, and having so far already contributed £4818.75 gross, if I make a one-off SIPP payment of a minimum of £11,592.20 net that should gross up to £14,490.25 making a £19,309 total gross contribution this year, would that work to make everything basic rate, or am I still being dim?  

MX5huggy

Remember the HICBC starts at £50k (this year) which is different from the 40% tax band (£50271). But it’s also calculated on “adjusted net income” 
https://www.gov.uk/child-benefit-tax-charge

also do you not have the option of Salary Sacrifice for the AVC’s? 

QrizB

PloughmansLunch said:

So to eliminate the amount of 40% tax payable and keep full child benefit, and having so far already contributed £4818.75 gross, if I make a one-off SIPP payment of a minimum of £11,592.20 net that should gross up to £14,490.25 making a £19,309 total gross contribution this year, would that work to make everything basic rate, or am I still being dim?  

My very rough mental arithmetic came up with a value of £11-12k, so you're in the right ballpark.

PloughmansLunch

MX5huggy said:

Remember the HICBC starts at £50k (this year) which is different from the 40% tax band (£50271). But it’s also calculated on “adjusted net income” 
https://www.gov.uk/child-benefit-tax-charge

also do you not have the option of Salary Sacrifice for the AVC’s? 

Unfortunately not, LGPS & AVCs are both net pay (i.e I still pay full whack NI), and I’d already reduced my taxable income to match in my example above.

I’ll add a bit more to cover the difference between HIBC and higher rate thresholds though, thanks, I’d forgotten they don’t quite tally up.

BoGoF

On a seperate note, with savings income that high I hope you are utilising your ISA allowance.