SIPP Contributions as sole trader

ctsoton

I have earnt £65k as sole trader income.

I've been using an online tax calculator to put aside my tax and NI amount.  According to listentotaxman.com this comes in at £18058.

If I pay £15k into my SIPP will this mean I pay the same amount of tax as if I earned £50k? = £12014.


I currently have £20k in a cash ISA designated to pay the tax bill in January 2025.  This pays 4.75% which is £90ish pound a month.  So between now and January this will pay approx £720 a month in interest.

Is it more efficient and productive to pay £15k into my SIPP which will leave a tax bill of £12014.  That would mean between now and January 2025 I have a £7k tax deficit to make up

a)  It seems my choice is either pay £18k to HMRC or pay £15k into my SIPP.  So this seems like no brainer

b) 9 months to save £7k should be achievable if income stays as expected.  My budget includes £1666.66 monthly ISA contributions, so it would take me 4 months to make back the deficit.

If I kept the £18k in the cash ISA and paid HMRC full amount then my 2024-2025 ISA contributions would go straight into my S&S ISA.

Paying 15k into my SIPP means delaying contributing to the S&S ISA by using the first 4 months of contributions for my 2023-2024 tax bill.  But this is 'compensated' by investing earlier into my SIPP and getting the £3750 relief at source top up.

I am currently in process of setting up a LTD company, so all sole trader income will be going into the LTD company and I will be withdrawing salary/dividends to reduce my personal tax bill significantly....so it should not be an issue to save £7k for 2023-2024 alongside the 24-25 bill


Am I missing anything and does this seem like a sound plan?

Dazed_and_C0nfused

You have one quite big misunderstanding.

Contributions to a SIPP would be made using the relief at source (RAS) and these do not reduce the amount of taxable income, you would still have £65k profit (assuming that's what you mean by "earnt") to be taxed.

But they do increase your basic rate band so more income can be taxed at 20% and less at 40%.

If you mean you want to have a pension fund of £15k then you would hand over £12k and the pension company, courtesy of HMRC, would add £3k in basic rate tax relief.

You then show this contribution on your Self Assessment return (in the pension contribution section) and your basic rate band would be £52,700 rather than £37,700.

ctsoton

Dazed_and_C0nfused said:

and these do not reduce the amount of taxable income


But they do increase your basic rate band so more income can be taxed at 20% and less at 40%.

Isn't that the same thing?

I know that the pension tops up 20% at source.

I'm trying to understand how my tax bill is affected by paying in anything over the 40% threshold.

For simplicity sake.  What will my tax bill be if I make £65k net profit and then pay £15k into my sipp

Dazed_and_C0nfused

ctsoton said:

Dazed_and_C0nfused said:

and these do not reduce the amount of taxable income


But they do increase your basic rate band so more income can be taxed at 20% and less at 40%.

Isn't that the same thing?

I know that the pension tops up 20% at source.

I'm trying to understand how my tax bill is affected by paying in anything over the 40% threshold.

For simplicity sake.  What will my tax bill be if I make £65k net profit and then pay £15k into my sipp

No 😳

Paying no tax on £15k is completely different to paying 20% on it!

If your only taxable income was £65k profit then the personal tax saving would be £2,946.

ctsoton

Dazed_and_C0nfused said:

No 😳

Paying no tax on £15k is completely different to paying 20% on it!

If your only taxable income was £65k profit then the personal tax saving would be £2,946.

So I won't be salary sacrificing £15k by paying into the SIPP?

£15k

+ £ 3750 relief at source added to pension

Then minus £2946 from the tax bill?


So £18058.50 tax on 65k
minus £2946

= £15112.50  ?

Dazed_and_C0nfused

ctsoton said:

Dazed_and_C0nfused said:

No 😳

Paying no tax on £15k is completely different to paying 20% on it!

If your only taxable income was £65k profit then the personal tax saving would be £2,946.

So I won't be salary sacrificing £15k by paying into the SIPP?

£15k

+ £ 3750 relief at source added to pension

Then minus £2946 from the tax bill?


So £18058.50 tax on 65k
minus £2946

= £15112.50  ?

Sorry, don't understand how you can use salary sacrifice when you haven't got a salary to sacrifice 🤔

I have earnt £65k as sole trader income

Or is there more to this than you have previously disclosed?

ctsoton

Dazed_and_C0nfused said:

Sorry, don't understand how you can use salary sacrifice when you haven't got a salary to sacrifice 🤔

I have earnt £65k as sole trader income

Or is there more to this than you have previously disclosed?

I've made £65k net profit, so I'm asking if £15k pension contributions function the same way as a salary sacrifice?

Dazed_and_C0nfused

ctsoton said:

Dazed_and_C0nfused said:

Sorry, don't understand how you can use salary sacrifice when you haven't got a salary to sacrifice 🤔

I have earnt £65k as sole trader income

Or is there more to this than you have previously disclosed?

I've made £65k net profit, so I'm asking if £15k pension contributions function the same way as a salary sacrifice?

No.  You will still be taxed on £65k whatever pension contributions you make.

ctsoton

Dazed_and_C0nfused said:

No.  You will still be taxed on £65k whatever pension contributions you make.

 OK, but only at 20% 

Which will =  £2946 ?

How did you get the £2946 figure?

Dazed_and_C0nfused

ctsoton said:

Dazed_and_C0nfused said:

No.  You will still be taxed on £65k whatever pension contributions you make.

 OK, but only at 20% 

Which will =  £2946 ?

How did you get the £2946 figure?

If you don't make the pension contribution you will pay tax,

£37,700 x 20% = £7,540
£14,730 x 40% = £5,892
Total = £13,432

If you pay £15,000 (either as the net payment or the gross amount) into a SIPP or personal pension the tax will be

£52,430 x 20% = £10,486

Difference between the two is £2,946.