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

Phoenix72

crabbycrabcrab said:

[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?

Not with pension contributions no. Other options coukd be EIS/VCT relief but would seek professional advice.

Jeremy535897

crabbycrabcrab said:

[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?

You have to look at it in the round. You pay £2,000 tax but your pension fund gets £2,000 refund. You only pay £8,000 into your pension fund instead of £10,000. It's the same end result. You are already paying 0.

crabbycrabcrab

Jeremy535897 said:

crabbycrabcrab said:

[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?

You have to look at it in the round. You pay £2,000 tax but your pension fund gets £2,000 refund. You only pay £8,000 into your pension fund instead of £10,000. It's the same end result. You are already paying 0.

Ive just tried to simulate this in a tax return. It doesn't seem to work. the tax bill is higher than if i put all the 10k in. its like the 2k i dont put in gets taxed 

[Deleted User]

crabbycrabcrab said:

Jeremy535897 said:

crabbycrabcrab said:

[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?

You have to look at it in the round. You pay £2,000 tax but your pension fund gets £2,000 refund. You only pay £8,000 into your pension fund instead of £10,000. It's the same end result. You are already paying 0.

Ive just tried to simulate this in a tax return. It doesn't seem to work. the tax bill is higher than if i put all the 10k in. its like the 2k i dont put in gets taxed 

Of course it will be. If you contribute £10000 it will be grossed up to £12500 and you will pay an extra £12500 at 20% before paying 40%. If you contribute £8000 that £12500 figure is reduced to £10000 and you will pay more tax at 40%. 

I think you should perhaps have a little more faith in what every contributor is telling you as opposed to trying to achieve the unachievable. 

InMyDreams

crabbycrabcrab said:

Jeremy535897 said:

crabbycrabcrab said:

[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?

You have to look at it in the round. You pay £2,000 tax but your pension fund gets £2,000 refund. You only pay £8,000 into your pension fund instead of £10,000. It's the same end result. You are already paying 0.

Ive just tried to simulate this in a tax return. It doesn't seem to work. the tax bill is higher than if i put all the 10k in. its like the 2k i dont put in gets taxed 

The more you put into your pension, the lower your tax bill (assuming you are still into 40% territory anyway). Plus you get the uplift in the pension pot. Both happen regardless of what your side hustle profit was and even if you didn’t make any profit.

crabbycrabcrab

[Deleted User] said:

crabbycrabcrab said:

Jeremy535897 said:

crabbycrabcrab said:

[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?

You have to look at it in the round. You pay £2,000 tax but your pension fund gets £2,000 refund. You only pay £8,000 into your pension fund instead of £10,000. It's the same end result. You are already paying 0.

Ive just tried to simulate this in a tax return. It doesn't seem to work. the tax bill is higher than if i put all the 10k in. its like the 2k i dont put in gets taxed 

Of course it will be. If you contribute £10000 it will be grossed up to £12500 and you will pay an extra £12500 at 20% before paying 40%. If you contribute £8000 that £12500 figure is reduced to £10000 and you will pay more tax at 40%. 

I think you should perhaps have a little more faith in what every contributor is telling you as opposed to trying to achieve the unachievable. 

OK i think i get what you mean now. Whatever i put into my sipp as a self employed person just adjusts my tax band from £12500 up by whatever was put into the sipp? 

I think im just fixated on that 

1. If used salary sacrifice on 10k i save on tax with that. 0% due plus no Ni, this is correct?

2. If i was paid normally though paye through my normal job id be taxed 40% + ni and put the money into a sipp, id get 25% uplift and could use a self assessment for additional uplift. Resulting in essentially 0% tax taken on the money. but i still pay ni. Is this correct?

im not understanding a way to do this with sole trader/side hustle income. Seems uneven if the two point above are true there is no way to do this with pensions as a sole trader and max i can reduce is by 20%


Seriously thank you so much for the help on this. Really appreciate it!

InMyDreams

The income tax you pay on your salary and your side hustle (and any other income you have eg dividends or savings interest or anything else) is not calculated in isolation. All income streams need to be considered together before your tax position can be calculated. What you pay through PAYE is only ever provisional until the whole picture is known at the end of the tax year, which also includes looking at things like pension and gift aid payments. Adjustments can then be made and you will either owe tax or be due a refund.

Your number 2 works the same whether your income is from employment or self employment or a mixture of the two. But you will only benefit from extra tax relief to the extent that that income would have been taxed at 40%.