Is this a legit way to pay BTL income into a SIPP?

fizio

Person A has 12k annual payroll salary and 12k BTL income. The salary is not taxed as below the standard allowance and the BTL income is taxed at 20%.
If Person A then put 10K into a SIPP then they get  the 20% uplift so effectively the BTL income is put into the SIPP and no tax paid. 
Am not convinced but seems to make sense?

Grumpy_chap

fizio said:

Person A has 12k annual payroll salary and 12k BTL income. The salary is not taxed as below the standard allowance and the BTL income is taxed at 20%.
If Person A then put 10K into a SIPP then they get  the 20% uplift so effectively the BTL income is put into the SIPP and no tax paid. 
Am not convinced but seems to make sense?

From a technicality point of view, the individual would be making contributions from the earned income into the pension.  The total that can be contributed by the individual is their relevant income (earned income) on a gross basis.  Assuming there are no personal contribution to pension as pay-roll deduction, a contribution of £9.6k will be grossed up to £12k.

This will not make any difference to the income tax due - that will still be calculated on the basis of the £12k salary plus £12k BTL income, meaning that the majority of the BTL income will be liable for IT at 20%.
Has the individual allowed for all permissible expenses against the BTL income?

NoMore

Money is fungible so yes that's fine.

You are still eligible for tax relief against the 12k salary despite not paying tax directly on it due to the personal Allowance.

Dazed_and_C0nfused

fizio said:

Person A has 12k annual payroll salary and 12k BTL income. The salary is not taxed as below the standard allowance and the BTL income is taxed at 20%.
If Person A then put 10K into a SIPP then they get  the 20% uplift so effectively the BTL income is put into the SIPP and no tax paid. 
Am not convinced but seems to make sense?

They couldn't do that as it's actually a 25% "uplift" so the gross contribution would be £12,500 and their earnings would limit the gross contribution to £12,000.

It would make absolutely no difference to their personal tax liability though.  They would still be taxed exactly the same as if they hadn't make the contribution.

But they would have a pension fund of £12k for an outlay of just £9,600 (using the earning limit that applies to your scenario).

Linton

You can contribute a total of your gross earnings (in this case £12K) across all your pensions in a tax year.  It does not matter where the the money actually comes from as long as it does not come from the tax free lump sum of another pension.

In this case if A had not contributed to any other pension in the tax year they could pay up to £12K X 4/5 =£9600 into a SIPP.  The missing 20% would be added by the SIPP provider to give a total of £12K.  Whether the £9600 came from earnings or BTL income is not relevent.

Dazed_and_C0nfused

And yes, that £2,400 in pension tax relief is more than the income tax that will be due on non savings non dividend income of £24,000 🙃

Sarahspangles

fizio said:

Person A has 12k annual payroll salary and 12k BTL income. The salary is not taxed as below the standard allowance and the BTL income is taxed at 20%.
If Person A then put 10K into a SIPP then they get  the 20% uplift so effectively the BTL income is put into the SIPP and no tax paid. 
Am not convinced but seems to make sense?

The £12k SIPP contribution would cost Person A £9.6k so on paper they would be £2.4k better off.

However when they want to draw on the SIPP they can take 25% of their £12k tax free but the rest will be taxed. If they are already using all their personal allowance they will pay 20% tax on it (at current rates). The net gain is 6.25% of their contribution.

Marcon

Linton said:

You can contribute a total of your gross earnings (in this case £12K) across all your pensions in a tax year.  It does not matter where the the money actually comes from as long as it does not come from the tax free lump sum of another pension.

It could, where the lump sum(s) in a year are no more than £7,500, without being classed as recycling.  It could potentially be more, depending on individual circumstances.

Assume the BTL income isn't holiday letting, which can be used for pension contribution purposes:

• income from a UK and/or EEA furnished holiday lettings business, which is chargeable under Part 3 ITTOIA 2005 (applies if the business is conducted individually, or as a partner acting personally in a partnership)

• a UK furnished holiday lettings business means a UK property business so far as it consists of the commercial letting of furnished holiday accommodation (Chapter 6 Part 3 ITTOIA 2005).
• an EEA furnished holiday lettings business means an overseas property business so far as it consists of the commercial letting of furnished holiday accommodation (Chapter 6 Part 3 ITTOIA 2005) in one or more EEA states.

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

fizio

Thanks very much everyone for clarifying and the key point for me here is that I am better off long term by paying 9.6k into the pension and its all legit.

"The £12k SIPP contribution would cost Person A £9.6k so on paper they would be £2.4k better off."