Advice on steps to be tax efficient with a side hustle that went over 1k trading allowence

crabbycrabcrab

Hi, im in the 40% tax bracket with my normal job and made 10k on a one off favour for a friends company.

Im wondering what my options are in how to use this 10k effectively. I read i have to do a self assessment i can put into a sipp to reduce tax on this 10k to 0? If so how do i go about doing this. I have a sipp with vanguard that i opened a few years ago. 

Any guidance appreciated! 

[Deleted User]

crabbycrabcrab said:

Hi, im in the 40% tax bracket with my normal job and made 10k on a one off favour for a friends company.

Im wondering what my options are in how to use this 10k effectively. I read i have to do a self assessment i can put into a sipp to reduce tax on this 10k to 0? If so how do i go about doing this. I have a sipp with vanguard that i opened a few years ago. 

Any guidance appreciated! 

A SIPP does not reduce your tax liability. What will happen is that the level above which you pay 40% tax will be increased. A £800 SIPP contribution would mean that you pay tax at 20% as opposed to 40% on £1000 of taxable income. 

swingaloo

Is this in addition to the side hustle you recently posted about which was £20,000?

crabbycrabcrab

swingaloo said:

Is this in addition to the side hustle you recently posted about which was £20,000?

It isn't. The numbers are off for identity purposes. But the question was about sole trading. Please just focus on this post independently 

crabbycrabcrab

[Deleted User] said:

crabbycrabcrab said:

Hi, im in the 40% tax bracket with my normal job and made 10k on a one off favour for a friends company.

Im wondering what my options are in how to use this 10k effectively. I read i have to do a self assessment i can put into a sipp to reduce tax on this 10k to 0? If so how do i go about doing this. I have a sipp with vanguard that i opened a few years ago. 

Any guidance appreciated! 

A SIPP does not reduce your tax liability. What will happen is that the level above which you pay 40% tax will be increased. A £800 SIPP contribution would mean that you pay tax at 20% as opposed to 40% on £1000 of taxable income. 

interesting! So there isnt a way to reduce to 0? Only just tax down to 20%?

DoctorStrange

Can you increase your pension contributions from your normal job by 10k?

crabbycrabcrab

DoctorStrange said:

Can you increase your pension contributions from your normal job by 10k?

I cant sadly. i spoke to my manager. It would be great if I could SS as saves on NI to i read

Jeremy535897

crabbycrabcrab said:

[Deleted User] said:

crabbycrabcrab said:

Hi, im in the 40% tax bracket with my normal job and made 10k on a one off favour for a friends company.

Im wondering what my options are in how to use this 10k effectively. I read i have to do a self assessment i can put into a sipp to reduce tax on this 10k to 0? If so how do i go about doing this. I have a sipp with vanguard that i opened a few years ago. 

Any guidance appreciated! 

A SIPP does not reduce your tax liability. What will happen is that the level above which you pay 40% tax will be increased. A £800 SIPP contribution would mean that you pay tax at 20% as opposed to 40% on £1000 of taxable income. 

interesting! So there isnt a way to reduce to 0? Only just tax down to 20%?

This is a common misconception. Under the old retirement annuity rules, if you had a 40% tax liability on £10,000, you put £10,000 in your pension scheme. The result was that your pension scheme now had £10,000 in it, at a cost to you of £10,000 - £4,000 tax relief = £6,000.
Today, you put £8,000 in your pension scheme, not £10,000. HMRC adds £2,000 to the pension scheme and you get £2,000 tax relief. The result is that your pension scheme now has £8,000 plus £2,000 = £10,000 in it, at a cost to you of £8,000 - £2,000 = £6,000.
The two results are identical.

crabbycrabcrab

Jeremy535897 said:

crabbycrabcrab said:

[Deleted User] said:

crabbycrabcrab said:

Hi, im in the 40% tax bracket with my normal job and made 10k on a one off favour for a friends company.

Im wondering what my options are in how to use this 10k effectively. I read i have to do a self assessment i can put into a sipp to reduce tax on this 10k to 0? If so how do i go about doing this. I have a sipp with vanguard that i opened a few years ago. 

Any guidance appreciated! 

A SIPP does not reduce your tax liability. What will happen is that the level above which you pay 40% tax will be increased. A £800 SIPP contribution would mean that you pay tax at 20% as opposed to 40% on £1000 of taxable income. 

interesting! So there isnt a way to reduce to 0? Only just tax down to 20%?

This is a common misconception. Under the old retirement annuity rules, if you had a 40% tax liability on £10,000, you put £10,000 in your pension scheme. The result was that your pension scheme now had £10,000 in it, at a cost to you of £10,000 - £4,000 tax relief = £6,000.
Today, you put £8,000 in your pension scheme, not £10,000. HMRC adds £2,000 to the pension scheme and you get £2,000 tax relief. The result is that your pension scheme now has £8,000 plus £2,000 = £10,000 in it, at a cost to you of £8,000 - £2,000 = £6,000.
The two results are identical.

If i put 8k of the 10k in, am i not taxed on the 2k i didnt put in?

Am i just best putting the full 10k in for the most minimal tax burden?

Phoenix72

crabbycrabcrab said:

Jeremy535897 said:

crabbycrabcrab said:

[Deleted User] said:

crabbycrabcrab said:

Hi, im in the 40% tax bracket with my normal job and made 10k on a one off favour for a friends company.

Im wondering what my options are in how to use this 10k effectively. I read i have to do a self assessment i can put into a sipp to reduce tax on this 10k to 0? If so how do i go about doing this. I have a sipp with vanguard that i opened a few years ago. 

Any guidance appreciated! 

A SIPP does not reduce your tax liability. What will happen is that the level above which you pay 40% tax will be increased. A £800 SIPP contribution would mean that you pay tax at 20% as opposed to 40% on £1000 of taxable income. 

interesting! So there isnt a way to reduce to 0? Only just tax down to 20%?

This is a common misconception. Under the old retirement annuity rules, if you had a 40% tax liability on £10,000, you put £10,000 in your pension scheme. The result was that your pension scheme now had £10,000 in it, at a cost to you of £10,000 - £4,000 tax relief = £6,000.
Today, you put £8,000 in your pension scheme, not £10,000. HMRC adds £2,000 to the pension scheme and you get £2,000 tax relief. The result is that your pension scheme now has £8,000 plus £2,000 = £10,000 in it, at a cost to you of £8,000 - £2,000 = £6,000.
The two results are identical.

If i put 8k of the 10k in, am i not taxed on the 2k i didnt put in?

Am i just best putting the full 10k in for the most minimal tax burden?

You will still be taxed on the £10k anyway, just at a lower (20%) rate. As explained above a net contribution of £8k net is £10k with tax relief added so your basic rate band is extended by £10k if you pay £8k

crabbycrabcrab

Phoenix72 said:

crabbycrabcrab said:

Jeremy535897 said:

crabbycrabcrab said:

[Deleted User] said:

crabbycrabcrab said:

Hi, im in the 40% tax bracket with my normal job and made 10k on a one off favour for a friends company.

Im wondering what my options are in how to use this 10k effectively. I read i have to do a self assessment i can put into a sipp to reduce tax on this 10k to 0? If so how do i go about doing this. I have a sipp with vanguard that i opened a few years ago. 

Any guidance appreciated! 

A SIPP does not reduce your tax liability. What will happen is that the level above which you pay 40% tax will be increased. A £800 SIPP contribution would mean that you pay tax at 20% as opposed to 40% on £1000 of taxable income. 

interesting! So there isnt a way to reduce to 0? Only just tax down to 20%?

This is a common misconception. Under the old retirement annuity rules, if you had a 40% tax liability on £10,000, you put £10,000 in your pension scheme. The result was that your pension scheme now had £10,000 in it, at a cost to you of £10,000 - £4,000 tax relief = £6,000.
Today, you put £8,000 in your pension scheme, not £10,000. HMRC adds £2,000 to the pension scheme and you get £2,000 tax relief. The result is that your pension scheme now has £8,000 plus £2,000 = £10,000 in it, at a cost to you of £8,000 - £2,000 = £6,000.
The two results are identical.

If i put 8k of the 10k in, am i not taxed on the 2k i didnt put in?

Am i just best putting the full 10k in for the most minimal tax burden?

You will still be taxed on the £10k anyway, just at a lower (20%) rate. As explained above a net contribution of £8k net is £10k with tax relief added so your basic rate band is extended by £10k if you pay £8k

Im on hmrc now putting the numbers in. If i put 8k into the sipp my tax bill is higher than if i put 10k into the sipp. 

Is that right? So i am best putting 10k into the sipp?