How does SIPP tax relief work?

mrichard69

My wife has just been paid a taxable £64,278 redundancy amount at the end of March 2024. She has been taxed to the tune of £24,536. She is normally a standard rate tax payer but it looks to me like she's been taxed at about £38% on this payment.  I understand that we can get the tax paid back by putting the remaining £39,742 into a SIPP but I don't really understand the process? Please can someone explain how this works? Do we just pay it into the SIPP we have ready?

Dazed_and_C0nfused

I think you need to check your figures first.

She will receive basic rate tax relief on her (net) contribution (25% of what she pays).

But she can't "get the tax back" on the redundancy payment.

She will be entitled to some higher rate relief but the exact amount depends on how much higher rate tax she would have paid for the year as a whole.  The SIPP contribution will increase her basic rate band so more income is taxed at 20% and less at 40%.

Even Scotland doesn't have a 38% tax rate, it's probably a mix of some or all of 0%, 20%, 40% and 45%.

Green_hopeful

There is a tax anomaly where sometimes termination payments are taxed in a funny way. I think it is if the termination payment comes after the P45. There is a form you can fill in to reclaim the overpaid tax. https://www.gov.uk/guidance/claim-back-income-tax-when-youve-stopped-working

i  added my termination payment to what I had already earned in the financial year and then took the £30k off. I put it into the income tax calculator on money saving which told me roughly what I should have paid. There is a similar calculator on the .gov website. I submitted the P50. I then got quite a bit of tax repaid. It took about 3 months.

If she is going to pay into a SIPP for the tax advantage she needs to do it this financial year. So pretty quick. She would get the relief as mentioned above. So if she can put £40k into a SIPP the government would top it up by £10k. This takes about 8 weeks to come through but it comes automatically. 

If she is a higher rate tax payer she can then reclaim the higher rate tax paid. There are templates to do this online. 

I also paid a large chunk into a SIPP. There are considerations about getting the money back out of a SIPP because it may be taxable to withdraw the funds later. 

I am currently reclaiming the higher rate tax on my SIPP payments. It’s been nearly three months and they have just asked for more information. 😒 I expect it will be another three months. 

Veteransaver

Does she have her payslip and is it the final one for this tax year? It should be assuming she is paid monthly and there are no other payments coming to her before 5th April.
You'd need to take the taxable income to date figure from the payslip, take 50k off it and the difference would need to go into the pension. (this assumes she has no other income like savings or dividend interest)
Eg if her taxable pay for the year is 100k she'd want to put £50k gross into the Sipp (which means paying in £40k as the Sipp will reclaim the 20%).
But she'll need to act fast to get it in for this tax year. I've heard Vanguard pensions can be quick to set up (although not technically a Sipp)  Also bear in mind the 60k max (this includes any employer contributions) but she can also take advantage of carry back for last 3 years at 40k a year.
The tax suffered which has been overpaid via the payroll between 20-40% can be reclaimed on a self assessment return or by contacting HMRC after tax year end.
Often it can be easier just to fill in a self assessment return though.

Marcon

Veteransaver said:

But she'll need to act fast to get it in for this tax year. I've heard Vanguard pensions can be quick to set up (although not technically a Sipp)  Also bear in mind the 60k max (this includes any employer contributions) but she can also take advantage of carry back for last 3 years at 40k a year.

It's carry forward rather than carry back - see https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/carry-forward

mrichard69

Thanks for all the replies. My wife will not be working from now on. Could she not pay into the SIPP in the next financial year and still get tax relief?

ColdIron

mrichard69 said:

Thanks for all the replies. My wife will not be working from now on. Could she not pay into the SIPP in the next financial year and still get tax relief?

Yes but not very much. She will be limited by her earnings which will presumably be £0. But even non earners, or very low earners, can contribute £2,880 net to get £720 relief for a gross contribution of £3,600 to her pension

Albermarle

I also paid a large chunk into a SIPP. There are considerations about getting the money back out of a SIPP because it may be taxable to withdraw the funds later. 

But to be clear if you get 40% tax relief and most likely pay 15% at most on the way out, it is still a nice boost.

Often it can be easier just to fill in a self assessment return though.

HMRC discourage people from filling in SA when it is not necessary and could well even block it. 

My wife will not be working from now on. Could she not pay into the SIPP in the next financial year and still get tax relief?

No you need to get on with it. Luckily opening a new pension online is quick and easy, as is depositing the money. I would not worry too much at this stage which pension provider to use, you can always transfer it later.

The deposit will go in as cash. At some point you may wish to invest some or all of it but that can wait until later.

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