Childcare Support: SIPP to reduce Net Adjusted Income

PUGXS_22

Hi Everyone,

Long time lurker, first time poster - please be kind!!

I need some help with Net Adjusted Income (NAI) for Self Assessment tax return - with a young daughter of nursery age, I am trying to stay below £100k NAI so as not to impact the 30 hours free childcare.

I thought I had researched and answered my own question by reading through the various threads on here and was feeling really confident but when testing my theory on my current self assessment, I think I have failed, so really need some support please!! Thank you in advance!

Essentially, I left my permanent employment in Oct'24 having earned £87k of income and paid £28k in income tax, cumulatively to that point. I have since found employment as a contractor, being paid via an umbrella company through PAYE. Having secured a contract that takes me beyond the tax year, I have estimated the my potential earnings/tax at the tax year-end.

I anticipate to have earnt ~£126k and paid ~£40k in tax cumulatively by the end of the tax year (rough calculations). For the purposes of these rough calculations we will assume I have no other taxable income sources as its the principal I am trying to nail down.

Having spent time researching on here how to avoid losing the childcare support my plan was to make a one-off lump-sum payment into a SIPP towards the end of the financial year to bring my Net Adjusted Income to £98k (give myself a little wriggle room!). In my plan, I anticipated to make a one-off contribution to the SIPP and then this would also result in a tax reclaim after the tax year-end as I would have overpaid tax on that Net Adjusted Income.

My calculations suggested I would need to make a SIPP payment of ~£22k (£28k / 1.25). I was then expecting that this would return a tax rebate of ~£13k as I would have paid ~£40k tax when I should have paid closer to ~£27k on a £98k income. 

However - as I haven't completed my SA for 23/24 yet, I decided to simulate this position in my 23/24 tax return to see if it flowed through as expected. However what popped out the other end was a £5k rebate and a taxable income still showing at £114k.....?!? I am really confused - have I calculated this wrong? 

As said, any help gratefully appreciated. Please be kind - I am new to these types of tax calculations so am sure I have made a fundamental error!

Thank you

DRS1

Try putting 28 instead of 22 and see what that does.  The 114 seems odd though 126 - 22 should be 104.

I don't think you would get a 13k rebate on a 22k contribution - more like 4400 (though you may have crept into the 45% band so it could be more and more still if you are saving some personal allowance)

sheramber

Did you enter £28 as the pension contribution figure?

Step 3 — take off pension contributions

If you made a contribution to a pension scheme where your pension provider has already given you tax relief at basic rate, take off the ‘grossed-up’ amount — what you paid plus the basic rate of tax.

So, for every £1 of pension contribution you made, take £1.25 from your ‘net income’.

https://www.gov.uk/guidance/adjusted-net-income

Nomunnofun1

£22000 payment into a SIPP will be grossed up to £27500, not £28000. 

£22000/0.8 is £27500. 

Without the pension contribution tax on £126000 is 

37700 @ 20%

87440 @ 40%

860 @ 45%

Total £42903

With a SIPP contribution of £22000

12570 free of tax
65200 @ 20%

48230  @ 40%

Total £32332

Difference is £10571 plus an addition £5500 to be claimed from HMRC by the pension provider in respect of BR relief on the SIPP. 

£27500 has been added to the pension fund at a net cost of £11429 AND childcare is preserved. 

Sounds like a good deal!

PUGXS_22

Nomunnofun1 said:

£22000 payment into a SIPP will be grossed up to £27500, not £28000. 

£22000/0.8 is £27500. 

Without the pension contribution tax on £126000 is 

37700 @ 20%

87440 @ 40%

860 @ 45%

Total £42903

With a SIPP contribution of £22000

12570 free of tax
65200 @ 20%

48230  @ 40%

Total £32332

Difference is £10571 plus an addition £5500 to be claimed from HMRC in respect of HR relief on the SIPP. 

£27500 has been added to the pension fund at a net cost of £11429 AND childcare is preserved. 

Sounds like a good deal!

Thank you - that is really helpful.

You are correct, £22k/0.8 is indeed £27.5k - hopefully you noticed that I was rounding to the nearest whole £k 

Your maths certainly seems a lot closer to mine and what I was expecting (albeit yours is definitely better executed than the way I worked it out!!). I have definitely underestimated the tax payable in the first instance as ~£40k - I concur with you that ~£43k is a better estimation.

Using your calculations above, are you able to shed some light on the following questions for me please?

1) What would my net adjusted income be? Is it £98,500 (£126,000 - £27,500), £104,000 (£126,000 - £22,000) or something else? I think it should be £98,500 but want to make sure I am understanding this correctly.

2) What are the cashflows involved here please - obviously, I need to pay out £22,000 into a SIPP but what are the cash flows back to me? is it the £10,571 or does the £5,500 flow back to me as cash as well (e.g. £16,071 gets claimed back as a rebate)?

My confusion comes from the fact I used to stay below the £100k threshold by using a salary sacrifice pension scheme through my employer and using AVCs to get the value right - the whole SIPP and claiming basic and higher rate relief confuses the hell out of me!!

Thank you!

Nomunnofun1

1) £98500

2) believe that I made an error in my earlier reply - cutting and pasting not great on an iPhone! See my third last paragraph which has been altered. You pay £22000 and your tax is reduced by £10571 - you will receive this as a refund. However your contribution will be grossed up to £27500. 

PUGXS_22

Nomunnofun1 said:

1) £98500

2) believe that I made an error in my earlier reply - cutting and pasting not great on an iPhone! See my third last paragraph which has been altered. You pay £22000 and your tax is reduced by £10571 - you will receive this as a refund. However your contribution will be grossed up to £27500. 

Thank you again. 

I definitely realise the mistake I made in my
Initial calculations - I assumed all of the tax difference would flow back to me as cash on the form of a rebate. What I didn’t click is that the £5,500 grossing up had already been paid into the SIPP and therefore wouldn’t return as part of any cash rebate. Thanks for helping clear that up!

I am still confused by the Net Adjusted Income though. It makes perfect sense to me that £126,000
less £27,500 Gross SIPP construction would be £98,500 and under my previous method of using a salary sacrifice pension scheme my end
of year P60 would have shown the net £98,500
as my income - easy. 

Where I find the SIPP contribution and tax relief reclaim confusing is that the way the Self Assessment deals with the scenario is to change the tax thresholds - that is why I was getting the £114k taxable income when I simulated it through my 23/24 SA tax return (£126,000 - £12,570 reinstated is £114,000 of taxable income). Therefore, SA shows gross income as £126,000, taxable income as £114,000. But is the Net Adjusted Income actually £98,500 despite the SA displaying the components differently even though it arrives to the same tax correction?

hopefully this makes sense. Thank you. 

Dazed_and_C0nfused

PUGXS_22 said:

Nomunnofun1 said:

1) £98500

2) believe that I made an error in my earlier reply - cutting and pasting not great on an iPhone! See my third last paragraph which has been altered. You pay £22000 and your tax is reduced by £10571 - you will receive this as a refund. However your contribution will be grossed up to £27500. 

Thank you again. 

I definitely realise the mistake I made in my
Initial calculations - I assumed all of the tax difference would flow back to me as cash on the form of a rebate. What I didn’t click is that the £5,500 grossing up had already been paid into the SIPP and therefore wouldn’t return as part of any cash rebate. Thanks for helping clear that up!

I am still confused by the Net Adjusted Income though. It makes perfect sense to me that £126,000
less £27,500 Gross SIPP construction would be £98,500 and under my previous method of using a salary sacrifice pension scheme my end
of year P60 would have shown the net £98,500
as my income - easy. 

Where I find the SIPP contribution and tax relief reclaim confusing is that the way the Self Assessment deals with the scenario is to change the tax thresholds - that is why I was getting the £114k taxable income when I simulated it through my 23/24 SA tax return (£126,000 - £12,570 reinstated is £114,000 of taxable income). Therefore, SA shows gross income as £126,000, taxable income as £114,000. But is the Net Adjusted Income actually £98,500 despite the SA displaying the components differently even though it arrives to the same tax correction?

hopefully this makes sense. Thank you. 

Taxable income is completely different to adjusted net income.

You have made relief at source pension contributions and they do not reduce your taxable income.

But, for some people, they do have three (or even four) important benefits,

1.  Basic rate relief is added to your net contribution.  So £100 from you has £25 added, to make a gross contribution of £125.

2.  The gross contribution increases your basic rate band.

3.  The gross contribution can be deducted when calculating your adjusted net income.

The tax saving from points 2 & 3 is personal to you, it never gets added to your pension fund, so in my example £100 will only ever be a gross contribution of £125 within your pension fund.  But you can save some personal tax meaning the real cost of getting £125 in your pension could easily be as low as £50.

On your level of income salary sacrifice is normally the best option, despite none of the three points above being relevant, but where this isn't available relief at source or net pay contributions ultimately achieve the same end result (from a tax perspective).

PUGXS_22

Thank you. 

So where exactly does my Adjusted Net Income get recognised or recorded?

My big fear in all of this is that I go to all
of this effort to calculate and make a one-off SIPP payment right before the end of the tax year (so in my mind, I only get one shot at getting this right), but because I don’t actually see anywhere that records my Adjusted Net Income as below £100k I am concerned that I will then lose the 30hrs childcare support, which would be a costly impact as it’s certainly not cheap!!!

Does anyone know how the HMRC actually processes things in these types of circumstances and how I can ensure I don’t inadvertently get stung?

Thanks

Dazed_and_C0nfused

PUGXS_22 said:

Thank you. 

So where exactly does my Adjusted Net Income get recognised or recorded?

My big fear in all of this is that I go to all
of this effort to calculate and make a one-off SIPP payment right before the end of the tax year (so in my mind, I only get one shot at getting this right), but because I don’t actually see anywhere that records my Adjusted Net Income as below £100k I am concerned that I will then lose the 30hrs childcare support, which would be a costly impact as it’s certainly not cheap!!!

Does anyone know how the HMRC actually processes things in these types of circumstances and how I can ensure I don’t inadvertently get stung?

Thanks

You just need to keep your own records.

Your Self Assessment calculation will recognise adjusted net income in the sense of it impacting any of the following (only the first of which seemingly applies to you) but as far as I'm aware there is no explicit personal calculation of ANI provided by HMRC

Personal Allowance
HICBC
Married Couple's Allowance

And is what happened in 2023-24 still relevant, for tax free child care purposes, coming towards 2025-26 🤔.  There might be, I just know hardly anything about TFC.

Nomunnofun1

PUGXS_22 said:

Thank you. 

So where exactly does my Adjusted Net Income get recognised or recorded?

My big fear in all of this is that I go to all
of this effort to calculate and make a one-off SIPP payment right before the end of the tax year (so in my mind, I only get one shot at getting this right), but because I don’t actually see anywhere that records my Adjusted Net Income as below £100k I am concerned that I will then lose the 30hrs childcare support, which would be a costly impact as it’s certainly not cheap!!!

Does anyone know how the HMRC actually processes things in these types of circumstances and how I can ensure I don’t inadvertently get stung?

Thanks

I think that you are panicking now for no reason - we have explained how the process works to some degree. 

You won’t ’inadvertently get stung’ in the same way as HMRC won’t withdraw your personal allowance.

You have the records to back up your claim - all you need.