Working out total contributions to a SIPP

Cleaver

Sorry if this has been asked before, but had a quick look around and couldn't spot anything.

I know that £60,000 is the maximum amount you can put in to a pension per year to claim tax relief, assuming you've used up your previous years' allowances.

If I'm a higher rate taxpayer and I contribute £40,000 in to my SIPP I'll get an instant 25% tax relief, which is £10,000, and will also be able to claim a further 20% through my end of year tax return, which is another £8,000.

Assuming no other pension contributions, how much have I contributed towards my SIPP in terms of the £60k tax relief limit? Is it:

A. £50,000 (the initial £40,000 + £10,000)
B. £58,000 (initial £40,000 + £10,000 + £8,000)

I would have assumed A, as the £8,000 second tax relief is not being contributed to the SIPP?

hugheskevi

It is A, but you also get £10,000 (not £8,000) of tax refunded, as it is 20% of £50,000. 

Once that is all done, you have £50,000 in the pension at a cost net of tax relief of £30,000.

Note, this assumes you receive only higher rate tax relief on all of the contribution. In practice, it is likely that some will either only get basic rate relief, or that you will benefit from a higher refund due to the taper of the Personal Allowance starting at £100,000 of annual taxable income.

Cleaver

Appreciate that Hugheskevi, thank you.

Didn't realise that it was 20% relief of the total contributions, thanks very much for that.

Would you mind just explaining a bit more about why it's likely that some of the contribution will only get basic tax relief?

dunstonh

Pension contriubtions are treated as gross by the provider and HMRC.     So, when it says your pension allowance is £60,000 it means £60,000 gross.      You should do any calculations using gross contributions.

Cleaver

Thanks Dunstonh, but I'm not clear whether answer A or B is the 'gross' example here?

hugheskevi

Cleaver said:

Would you mind just explaining a bit more about why it's likely that some of the contribution will only get basic tax relief?

I did not say that. I said "it is likely that some will either only get basic rate relief, or that you will benefit from a higher refund due to the taper of the Personal Allowance starting at £100,000 of annual taxable income."

You are using an example of £50,000 gross contribution. To get higher rate relief on the full contribution will therefore require taxable income of at least £50,000 subject to higher rate tax.

With standard allowances, income over £50,270 is subject to higher or additional rate of tax.

If you have £50,000 of income subject to higher rate tax and have standard allowances, that requires a taxable income of at least £100,270. That would put you on the taper for Personal Allowance.

The taper of personal allowance starts at £100,000 of taxable income, any taxable income above £100,000 contributed to a pension will therefore attract relief at either 60% (income subject to the taper) or 45% (income above the taper).

So either not all of the £50,000 will get higher rate relief, ie, taxable income is under £100,270, or the refund will be more than the amount specified due to the Personal Allowance taper and/or additional rate relief.

Note that in your example, A is the gross example, with a £50,000 gross amount going into the pension. 

Stargunner

Cleaver said:

Appreciate that Hugheskevi, thank you.

Didn't realise that it was 20% relief of the total contributions, thanks very much for that.

Would you mind just explaining a bit more about why it's likely that some of the contribution will only get basic tax relief?

To simplify things, if the 40% tax band started at £50k and you earn £70k, you would have been paying 40% tax on only 20k Therefore, you can only claim the additional tax relief on £20k of your pension contributions.

Secret2ndAccount

Technically, 60k is not the limit for tax relief - it's a hard limit above which you pay a penalty. You would still receive tax relief, provided you earned enough to make the excess contribution. It's not worthwhile to do this for most people.
The 60k is for the total that goes into the pension. That's your contrib, the tax top-up that goes into the pension (not the part that doesn't go into the pension), plus any employer contributions. It's the total amount that lands inside the pension.
If you earn 60k, and pay in 48k, you receive a 12k top-up so 60k is in the pension. But you only paid higher rate tax on less than 10k of your earnings, so the refund outside the pension will be less than 2k. There is a distinction here. Inside the pension you get a 25% top-up to all your contributions, irrespective of how much tax you actually paid. Outside the pension, your rebate is of the actual extra tax paid, not just 20% of everything.
If you're earning above 100k this gets highly beneficial. Firstly you can get back the extra 20% of a lot pension contribs; further to that, the contribs reduce your adjusted net income - the number that is used to taper away your personal allowance. So you can effectively benefit by 60% for some of your contribs.

Linton

Cleaver said:

Sorry if this has been asked before, but had a quick look around and couldn't spot anything.

I know that £60,000 is the maximum amount you can put in to a pension per year to claim tax relief, assuming you've used up your previous years' allowances.

If I'm a higher rate taxpayer and I contribute £40,000 in to my SIPP I'll get an instant 25% tax relief, which is £10,000, and will also be able to claim a further 20% through my end of year tax return, which is another £8,000.

Assuming no other pension contributions, how much have I contributed towards my SIPP in terms of the £60k tax relief limit? Is it:

A. £50,000 (the initial £40,000 + £10,000)
B. £58,000 (initial £40,000 + £10,000 + £8,000)

I would have assumed A, as the £8,000 second tax relief is not being contributed to the SIPP?

A.  As the higher rate relief goes to you personally, not your pension.

Cleaver

You're all massively helpful - appreciate it everyone, thanks!

Cleaver

Secret2ndAccount said:

If you're earning above 100k this gets highly beneficial. Firstly you can get back the extra 20% of a lot pension contribs; further to that, the contribs reduce your adjusted net income - the number that is used to taper away your personal allowance. So you can effectively benefit by 60% for some of your contribs.

Just to clarify this with an example - if you earned £150,000 via PAYE but then contributed £60,000 gross to a SIPP or private pension you're net adjusted income used to work out the tax would essentially be £90,000?