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

Phoenix72

crabbycrabcrab said:

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? 

It's lower because it's increased the gross amount to £12,500 and is offsetting some of the 40% tax you pay on your employment.

If you can affors to do so I suggest you do. 

When was the £10k extra income paid? This tax year or last?

crabbycrabcrab

It was last year. I put everything into a sipp. but cant really work out why im still paying tax So this year im trying to work out the best way to do this.

If i was paid normally though paye id be taxed 40% and put the money into a sipp, id get 25% uplift and could use a self assessment for addtional uplift i read. resulting in 0% tax on the money.

Phoenix72

crabbycrabcrab said:

It was last year. I put everything into a sipp. but cant really work out why im still paying tax So this year im trying to work out the best way to do this.

If i was paid normally though paye id be taxed 40% and put the money into a sipp, id get 25% uplift and could use a self assessment for addtional uplift i read. resulting in 0% tax on the money.

Not sure why you think you would be paying 0% on it.

[Deleted User]

crabbycrabcrab said:

It was last year. I put everything into a sipp. but cant really work out why im still paying tax So this year im trying to work out the best way to do this.

If i was paid normally though paye id be taxed 40% and put the money into a sipp, id get 25% uplift and could use a self assessment for addtional uplift i read. resulting in 0% tax on the money.

No!

1)  You put £8000 into a SIPP - you get no tax back on that. 

2) £2000 is added to the pension fund by HMRC - you get no tax back on that. Your pension fund has increased by £10000 even though you have only paid £8000. 

3) If £10000 of your income has been taxed at 40% rate YOU will be entitled to an additional tax relief of £2000. 

That’s it!

crabbycrabcrab

Phoenix72 said:

crabbycrabcrab said:

It was last year. I put everything into a sipp. but cant really work out why im still paying tax So this year im trying to work out the best way to do this.

If i was paid normally though paye id be taxed 40% and put the money into a sipp, id get 25% uplift and could use a self assessment for addtional uplift i read. resulting in 0% tax on the money.

Not sure why you think you would be paying 0% on it.

Maybe i've worded it wrong, but I mean it coming out at 0 tax in the end.

So if i used salary sacrifice on 10k i save on tax with that. 0% due

If i was paid normally though paye id be taxed 40% and put the money into a sipp, id get 25% uplift and could use a self assessment for addtional uplift i read. resulting in 0% tax on the money.

im not understanding a way to do this with sole trader/side huslte income

crabbycrabcrab

[Deleted User] said:

crabbycrabcrab said:

It was last year. I put everything into a sipp. but cant really work out why im still paying tax So this year im trying to work out the best way to do this.

If i was paid normally though paye id be taxed 40% and put the money into a sipp, id get 25% uplift and could use a self assessment for addtional uplift i read. resulting in 0% tax on the money.

No!

1)  You put £8000 into a SIPP - you get no tax back on that. 

2) £2000 is added to the pension fund by HMRC - you get no tax back on that. Your pension fund has increased by £10000 even though you have only paid £8000. 

3) If £10000 of your income has been taxed at 40% rate YOU will be entitled to an additional tax relief of £2000. 

That’s it!

ISorry, im not getting it, please bare with me. Appreciate your help with this 

1 and 2 - If i putt 8k in i get 25% uplift. in a sense its 20% tax back straight into my pension. 

3. 10k was side hustle money, its not been taxed.

sheramber

crabbycrabcrab said:

[Deleted User] said:

crabbycrabcrab said:

It was last year. I put everything into a sipp. but cant really work out why im still paying tax So this year im trying to work out the best way to do this.

If i was paid normally though paye id be taxed 40% and put the money into a sipp, id get 25% uplift and could use a self assessment for addtional uplift i read. resulting in 0% tax on the money.

No!

1)  You put £8000 into a SIPP - you get no tax back on that. 

2) £2000 is added to the pension fund by HMRC - you get no tax back on that. Your pension fund has increased by £10000 even though you have only paid £8000. 

3) If £10000 of your income has been taxed at 40% rate YOU will be entitled to an additional tax relief of £2000. 

That’s it!

ISorry, im not getting it, please bare with me. Appreciate your help with this 

1 and 2 - If i putt 8k in i get 25% uplift. in a sense its 20% tax back straight into my pension. 

3. 10k was side hustle money, its not been taxed.

But it will be taxed when you declare it  on your self employed pages of your self assessment tax return.

The tax will be assessed less any relief due.- in the example of £8000 that is £8000 @ 20% tax relief against the tax due at 40%

If you pay in £10000 then you will be assessed £10000 @ 40% less tax relief £10000 @20%- So you pay £10000 @20% instead of @ 40%.


The uplift by the pension company does not show on your tax calculation  and does not reduce your tax due. Only the additional tax relief reduces you tax liability.

You are lumping  the additional tax relief and the uplift by the pension company as tax relief but the pension company uplift does not reduce your tax bill , it is a payment from the pension company into your SIPP.

You get a reduced tax bill and an uplift into your SIPP.

[Deleted User]

crabbycrabcrab said:

[Deleted User] said:

crabbycrabcrab said:

It was last year. I put everything into a sipp. but cant really work out why im still paying tax So this year im trying to work out the best way to do this.

If i was paid normally though paye id be taxed 40% and put the money into a sipp, id get 25% uplift and could use a self assessment for addtional uplift i read. resulting in 0% tax on the money.

No!

1)  You put £8000 into a SIPP - you get no tax back on that. 

2) £2000 is added to the pension fund by HMRC - you get no tax back on that. Your pension fund has increased by £10000 even though you have only paid £8000. 

3) If £10000 of your income has been taxed at 40% rate YOU will be entitled to an additional tax relief of £2000. 

That’s it!

ISorry, im not getting it, please bare with me. Appreciate your help with this 

1 and 2 - If i putt 8k in i get 25% uplift. in a sense its 20% tax back straight into my pension. 

3. 10k was side hustle money, its not been taxed.

One more go!

let’s say you are a 40% taxpayer before considering your side-hustle of £10000.

As a result of you putting £8000 into a SIPP (uplifted to £10000 by the tax man) you will pay 20% tax on this side-hustle income of £10000 instead of 40%. 

crabbycrabcrab

sheramber said:

crabbycrabcrab said:

[Deleted User] said:

crabbycrabcrab said:

It was last year. I put everything into a sipp. but cant really work out why im still paying tax So this year im trying to work out the best way to do this.

If i was paid normally though paye id be taxed 40% and put the money into a sipp, id get 25% uplift and could use a self assessment for addtional uplift i read. resulting in 0% tax on the money.

No!

1)  You put £8000 into a SIPP - you get no tax back on that. 

2) £2000 is added to the pension fund by HMRC - you get no tax back on that. Your pension fund has increased by £10000 even though you have only paid £8000. 

3) If £10000 of your income has been taxed at 40% rate YOU will be entitled to an additional tax relief of £2000. 

That’s it!

ISorry, im not getting it, please bare with me. Appreciate your help with this 

1 and 2 - If i putt 8k in i get 25% uplift. in a sense its 20% tax back straight into my pension. 

3. 10k was side hustle money, its not been taxed.

But it will be taxed when you declare it  on your self employed pages of your self assessment tax return.

The tax will be assessed less any relief due.- in the example of £8000 that is £8000 @ 20% tax relief against the tax due at 40%

If you pay in £10000 then you will be assessed £10000 @ 40% less tax relief £10000 @20%- So you pay £10000 @20% instead of @ 40%.


The uplift by the pension company does not show on your tax calculation  and does not reduce your tax due. Only the additional tax relief reduces you tax liability.

You are lumping  the additional tax relief and the uplift by the pension company as tax relief but the pension company uplift does not reduce your tax bill , it is a payment from the pension company into your SIPP.

You get a reduced tax bill and an uplift into your SIPP.

So what should i be putting into the sipp to get relief that in essense is 0% at the end of it all? Or is it not possible?

crabbycrabcrab

[Deleted User] said:

crabbycrabcrab said:

[Deleted User] said:

crabbycrabcrab said:

It was last year. I put everything into a sipp. but cant really work out why im still paying tax So this year im trying to work out the best way to do this.

If i was paid normally though paye id be taxed 40% and put the money into a sipp, id get 25% uplift and could use a self assessment for addtional uplift i read. resulting in 0% tax on the money.

No!

1)  You put £8000 into a SIPP - you get no tax back on that. 

2) £2000 is added to the pension fund by HMRC - you get no tax back on that. Your pension fund has increased by £10000 even though you have only paid £8000. 

3) If £10000 of your income has been taxed at 40% rate YOU will be entitled to an additional tax relief of £2000. 

That’s it!

ISorry, im not getting it, please bare with me. Appreciate your help with this 

1 and 2 - If i putt 8k in i get 25% uplift. in a sense its 20% tax back straight into my pension. 

3. 10k was side hustle money, its not been taxed.

One more go!

let’s say you are a 40% taxpayer before considering your side-hustle of £10000.

As a result of you putting £8000 into a SIPP (uplifted to £10000 by the tax man) you will pay 20% tax on this side-hustle income of £10000 instead of 40%. 

Ahh i think i see!

Is there a way to reduce to 0? or is 20% the max i can get this 10k down to?