How to max out a SIPP in a tax year if you already are paying into an employer pension fund?

MiserlyMartin

I've not seen this question answered anywhere on the internet. I am paying 5% into an Aviva pension which is my employers scheme, and they match it. 

I wanted to pay 100% of my total salary this year into my pensions, ie employers pension 5% from me, with the SIPP getting the other 95% - as I understand is correct, as the 5% from the employer doesn't count.

My problem is, how do you arrive at the figure that is correct to pay into the SIPP? without overpaying ? Some months I get a £100 bonus, others not, and there are another 6 months to go of this tax year. I won't really know my salary for the year until my P60 comes. I understand that if you go over your earnings limit in the SIPP, you end up having to pay a tax penalty? Is that because HRMC have paid out tax relief on money above the limit, so they are just paying themselves that tax relief back?

Dazed_and_C0nfused

MiserlyMartin said:

I've not seen this question answered anywhere on the internet. I am paying 5% into an Aviva pension which is my employers scheme, and they match it. 

I wanted to pay 100% of my total salary this year into my pensions, with the SIPP getting the other 95% - as I understand is correct, as the 5% from the employer doesn't count.

My problem is, how do you arrive at the figure that is correct to pay into the SIPP? without overpaying ? Some months I get a £100 bonus, others not, and there are another 6 months to go of this tax year. I won't really know my salary for the year until my P60 comes. I understand that if you go over your earnings limit in the SIPP, you end up having to pay a tax penalty? Is that because HRMC have paid out tax relief on money above the limit, so they are just paying themselves that tax relief back?

A good starting point is to understand the contribution method being used for your employers scheme.

It is often relief at source (RAS), which is where the pension company adds basic rate relief to your contribution.  So that could 4% from you plus 1% being the basic rate relief (gross contribution of 5%).  Or 5% from you plus 1.25% being the basic rate relief (gross contribution 6.25%).

So check your pension account to see if pension tax relief is being added.

Sarahspangles

This page lists kinds of relevant UK earnings. If all of yours appear on your payslip by March payday, and that also tells you how much your contribution to your workplace pension is, do you need to wait for your P60? 

MiserlyMartin

Hi thanks for the really quick reply. My pension statement shows my contributions as net and the employers contributions as gross (higher figure, as gross). Somewhere in the overall statement, Aviva shows my total contributions gross, so I guess they are in the end claiming tax relief. I was actually wrong, it's 4% from me and 4% from the employer, it's the maximum they will match. I'd rather put the rest into my SIPP. Lower charges. They won't offer salary sacrifice or pay directly into my SIPP, so its their scheme or nothing.

So what I need to do then is assume the same amount net contributions for the future months of the year... add to what is paid to date  - then add on 20% tax relief? That will give me my gross total for the tax year... then subtract that from my expected gross salary?

Sarahspangles

The basic maths for someone with simple affairs and RAS pensions is:

relevant UK earnings 
  minus
workplace pension contribution (including tax relief)
  minus
personal pension contribution (including tax relief)

You could work out your ‘basic’ and contribute that every month and then top up for bonuses etc between March payslip and the SIPP’s cut off date for the tax year.

You added a bit to your original question about the process if you overpay.

You need to check two limits. The first is your relevant UK earnings. If you exceed this for the tax year, and then realise after the end of that tax year, you request a ‘refund of excess contributions lump sum’ from your SIPP. They also back out the tax relief. (This was me last year due to an employer mix up with some pay arrears).

The second is your Annual Allowance, currently £60k but also recently £40k pa. You can exceed this in one tax year by using carry forward from previous years, so long as you were contributing to pensions in those years and had spare allowance. If you exceed this limit there is a tax charge. 

This may be a clearer explanation! 

El_Torro

The biggest issue seems to be that you don't know for sure how much you will earn this tax year, due to the monthly bonus that you may or may not get. 

Can you wait until the end of the tax year to make your final contribution to your SIPP? This way you'll know what 100% of your salary is. Remember that payments into your SIPP may not be instant, so you need to make sure you hit the cut off for this tax year. As long as the money is in your SIPP by the 5th of April 2025 you should be OK. 

Linton

MiserlyMartin said:

Hi thanks for the really quick reply. My pension statement shows my contributions as net and the employers contributions as gross (higher figure, as gross). Somewhere in the overall statement, Aviva shows my total contributions gross, so I guess they are in the end claiming tax relief. I was actually wrong, it's 4% from me and 4% from the employer, it's the maximum they will match. I'd rather put the rest into my SIPP. Lower charges. They won't offer salary sacrifice or pay directly into my SIPP, so its their scheme or nothing.

So what I need to do then is assume the same amount net contributions for the future months of the year... add to what is paid to date  - then add on 20% tax relief? That will give me my gross total for the tax year... then subtract that from my expected gross salary?

I suggest you look at things the other way around.  Say your gross pension contributions are 4% of gross earnings and you want to (and have the Annual Allowance to do so) contribute the 96% of gross into a SIPP.  You actually pay in 80% of that figure into your SIPP and the provider will add the missing 20%.

When calculating SIPP contributions it is easiest to always work in terms of gross and then subtract the 20% rebate at the end.

MiserlyMartin

Thanks I was always wondering how it worked. I had assumed that say your total gross earnings were 10K so you pay 10k into the SIPP and then they give you the 20% tax relief on top. But it doesn't work like that if the tax relief would take you over the limit?

MiserlyMartin

Sarahspangles said:

The basic maths for someone with simple affairs and RAS pensions is:

relevant UK earnings 
  minus
workplace pension contribution (including tax relief)
  minus
personal pension contribution (including tax relief)

You could work out your ‘basic’ and contribute that every month and then top up for bonuses etc between March payslip and the SIPP’s cut off date for the tax year.

You added a bit to your original question about the process if you overpay.

You need to check two limits. The first is your relevant UK earnings. If you exceed this for the tax year, and then realise after the end of that tax year, you request a ‘refund of excess contributions lump sum’ from your SIPP. They also back out the tax relief. (This was me last year due to an employer mix up with some pay arrears).

The second is your Annual Allowance, currently £60k but also recently £40k pa. You can exceed this in one tax year by using carry forward from previous years, so long as you were contributing to pensions in those years and had spare allowance. If you exceed this limit there is a tax charge. 

This may be a clearer explanation! 

I was going to do a lump sum soon and then have it invested sooner rather than later. I wonder what HRMC do if you were not to spot an over payment. Not that I am intending to overpay. I would guess that they would spot it and claim the tax back?

Unfortunately I don't earn enough to take me over the 40K limit so I cannot claim 40% tax relief or use carry forward. I have woken up to the fact I have been under utilising my SIPP allowances!

dunstonh

MiserlyMartin said:

Thanks I was always wondering how it worked. I had assumed that say your total gross earnings were 10K so you pay 10k into the SIPP and then they give you the 20% tax relief on top. But it doesn't work like that if the tax relief would take you over the limit?

Tax relief is a reduction.  not an addition.  You get 20% relief on your contribution.  So, a £10,000 contribution would cost you £8,000 net of basic rate relief.

bjorn_toby_wilde

I made an accidental overpayment (forgot that there was a time lag of about 4 weeks between Sal Sac leaving my salary and hitting my pension account).

After year end Aviva wrote to me about the overpayment and presumably alerted HMRC. I had to pay the tax back, so yes, it would be picked up I believe. Whether it would be missed if you split the payment across more than one pension provider in the same year I don’t know, but as processes are automated and all linked to your NI number I suspect it wouldn’t.