Annual Allowance - SIPP

evie2468

dunstonh said:

evie2468 said:

Thank you. You are correct but my previous thread concerned clarifying misleading information given by the govt pension service and it concerned carry forward. So thanks to that thread I understand this. This question is different as it concerns how I work out how much I am allowed to put in. Thanks again.

What is misleading?

Someone earning under the annual allowance can pay an amount above their earnings in some scenarios.

Sorry I was referring to what someone said about my previous thread on annual Allowance and I explained that info from a govt  advisor was misleading.  So it didn't refer to this thread.

evie2468

Secret2ndAccount said:

Stage 1: You need to check your contributions against the Annual Allowance. Add together your PIA plus your SIPP contrib + the tax relief. If that total is less than 60k (or potentially more than 60k with carry-forward) then you don't need to worry about Annual Allowance - move on to stage 2

Stage 2: Forget about the PIA. The PIA is not used in Stage 2. PIA is not part of this calculation. You don't need to know what your PIA is because you aren't going to use it because it isn't part of this calculation. One other thing: this second calculation doesn't involve the PIA at all. There is no subtraction of the PIA. PIA doesn't feature in this second calculation. 
For this second calculation you need your taxable income. Then you take off any personal pension contributions you may have paid via your employer. Not the PIA. It isn't the PIA. It's just any money you paid into the pension scheme. Could be nothing if you are lucky. Could be a percentage of your salary. It will be a number that is shown on your payslip as a deduction. Now you can pay 8/10ths of what's left into the SIPP.
If you earn 25k, and pay 2.5k into your pension (not the PIA, just the payments) then you are left with 22,500.
Multiply 22,500 x 0.8 = 18,000
You pay 18,000 into the SIPP. Gov't tops it up to 22,500. That's all you can contribute. Any more and you are not entitled to the tax top-up.

Just remember that the PIA doesn't feature in the 2nd calculation

Thank you. That makes sense. 😊

evie2468

AlanP_2 said:

evie2468 said:

Thanks. My taxable pay will be around 25000. Then I take off my PIA. Not sure what I have misunderstood here.

So only the EARNINGS LIMIT is relevant to you (unless your PIA is going to be around the £40k plus level which I doubt).

Therefore ignore the PIA and calculate 80% of your taxable pay and that is what your maximum GROSS SIPP contribution can be.

So on TAXABLE PAY (not Net Pay or Gross Pay) of £25,000 it would be £20k gross with your provider claiming £5 of tax relief from HMRC on your behalf.

Thank you. I understand now.  

evie2468

zagfles said:

If as you say you're sure you'll be under the AA limit then presumably you're just worried about the tax relief limit. That's easy, it's just your taxable earnings (your contributions to the DB pension will almost certainly already be deducted from your taxable earnings). That's the gross so you'd put 80% of that into a SIPP and the SIPP would claim the 20% tax relief. 

So eg if salary is £30k and you contribute 10% as employee DB contribution then your taxable earnings would be £27k so you could pay in £21600 into a SIPP and the SIPP provider will claim £5400 tax relief. 

It's gets complicated if you look like exceeding the AA but you are likely to have a lot of carry forwards if you've not been making big contributions in the past. 

Thanks for your help.  Having read everything that is making it clearer now.