Tax question of saving into SIPP/ISA from investment account

ArthurSixpance

I wonder if I can ask opinions about whether I am dealing with my savings/investments in the most tax efficient way? I’ll outline what is happening at the moment and there are a couple of specific questions at the end of the post. Sorry, it might be quite long!

Actually, we are a married couple who have both been lucky enough to take early retirement a couple of years ago but our situations are so similar that I’ll describe it just as one person! I have been managing our savings/investments/retirement planning for about 15 years without involving an IFA.

I have a defined benefit pension (NHS) which completely covers annual living expenditure and leaves some over for saving/investment and I am just in the higher rate income tax band thanks to rental income.

I also have a SIPP, a stocks and shares ISA and a trading account, all with Interactive Investor and they are all in Vanguard Lifestrategy funds. So far, so good!

On the basis that the SIPP and ISA are tax efficient I am using the trading account investments (and any extra pension income) to maximally top up the ISA (£20kpa) and the SIPP (equivalent to yearly income). However, this runs the risk that capital gains on the trading account investments are above the £3000 limit and CGT would be 20% as I am a higher rate taxpayer.

I guess my questions are:

1: Because of the CGT issue, should I just limit the top ups of ISA and SIPP to keep below the CGT limit and, if i did, is the ISA or the SIPP the most tax efficient (I’ve always seen them as pretty similar)

2: If I ever needed a large amount of capital (eg property purchase) would it make more sense to use ISA capital, or to crystallise the SIPP? I’ve always assumed the ISA, as the SIPP is liable for income tax after the tax free lump sum.

I realise that there might not be a straightforward answer to either of those questions, or you might need more info but any comments would be helpful.

Believe me, I realise how fortunate I am (we are!) to even have to consider things like this, but I do get a bit bogged down in the different tax treatments of the three different investment pots!

Anyway, thanks for reading and glad to hear any thoughts!

Dazed_and_C0nfused

On the basis that the SIPP and ISA are tax efficient I am using the trading account investments (and any extra pension income) to maximally top up the ISA (£20kpa) and the SIPP (equivalent to yearly income)

That is a bit ambiguous.  What exactly do you mean in plain English?

Are you higher rate after taking into account the higher rate relief on your SIPP contributions (presumably just £3,600 gross)?

NoMore

When you say the SIPP (equivalent to yearly income) what do you actually mean, because as far as I can tell from what you say you don't have any relevant earnings to claim tax relief (neither the pension income or the rental income count). So unless you have some other relevant earnings your limited to £2880pa (£3600 after tax relief) to add to your SIPP and still get Tax relief.

Also treating the two of you as one doesn't really help people as you have two lots of tax allowances that may be different for each of you depending on the exact situation. It would be much better to break it down individually to get better advice.

ArthurSixpance

Thanks both.
maybe I am misunderstanding the SIPP contribution limits? I understood that you could contribute up to your yearly income, that is after adding the tax relief it doesn’t exceed income.
I am assuming my annual income is NHS pension, plus rental income, plus dividends from shares as per the tax return.
Isn’t it the case that if I’m paying income tax on that income then the SIPP contributions should have tax relief? I don’t see how the pension or rental income wouldn’t count.

MX5huggy

If you’re saying in order the have enough money to fill 2 ISA’s and add a bit to SIPPs you are going to have to pay some CGT then I would be taking the CGT hit, CGT is only going up and allowances down. 

Dazed_and_C0nfused

ArthurSixpance said:

Thanks both.
maybe I am misunderstanding the SIPP contribution limits? I understood that you could contribute up to your yearly income, that is after adding the tax relief it doesn’t exceed income.
I am assuming my annual income is NHS pension, plus rental income, plus dividends from shares as per the tax return.
Isn’t it the case that if I’m paying income tax on that income then the SIPP contributions should have tax relief? I don’t see how the pension or rental income wouldn’t count.

They definitely don't count for determining how much you can contribute to a pension.

Occasionally rental income profits do but in the majority of cases they don't.  So I would expect your limit to be £3,600 (inclusive of the basic rate tax relief that the provider adds).

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#earnings

NoMore

ArthurSixpance said:

Thanks both.
maybe I am misunderstanding the SIPP contribution limits? I understood that you could contribute up to your yearly income, that is after adding the tax relief it doesn’t exceed income.
I am assuming my annual income is NHS pension, plus rental income, plus dividends from shares as per the tax return.
Isn’t it the case that if I’m paying income tax on that income then the SIPP contributions should have tax relief? I don’t see how the pension or rental income wouldn’t count.

Yes your misunderstanding, you only get tax relief based on relevant earnings and Pension Income, Rental income (unless Holiday lets) and dividends don't count as relevant earnings.

PTM044100 - Contributions: tax relief for members: conditions - HMRC internal manual - GOV.UK (www.gov.uk)

Or a slightly easier to read piece (Key facts at the start):

Pension contributions - Need to know - Royal London for advisers

Sounds like you may have a lot of tax relief to return to HMRC.

ArthurSixpance

Thanks all. You are right that I have misunderstood the SIPP contribution limits, thinking that income was the relevant measure, where it actually seems to be earnings from employment. I will read the links you have attached and start untangling myself!
Yes, it looks as though a lot of tax relief will be going back to HMRC, better that it’s flagged up now!
Thanks all. 

ArthurSixpance

From the HMRC link, very clear:
For the avoidance of doubt a pension is not classed as earnings and cannot be included in the definition of relevant UK earnings.