Too late for SIPP?

jim._2

Hi,

'Er indoors is looking to do some tax avoidance by putting money into a SIPP. The plan is reduce her taxable income down to the 20% band (in current tax year). However, I was reading that we may have missed the deadline for self assessment which was 5th October 2024. First time doing this, so unsure if we have missed the boat for this? I know can still put the money into the SIPP until April, but we want to get the tax relief (40%) too.

She also received a message in the last couple of weeks about unpaid tax on interest in 2023-2024 and that HMRC were changing her tax code. This was paid a couple of days ago so hopefully the tax code will go back up but it's not showing on the account just yet.

Dazed_and_C0nfused

jim._2 said:

Hi,

'Er indoors is looking to do some tax avoidance by putting money into a SIPP. The plan is reduce her taxable income down to the 20% band (in current tax year). However, I was reading that we may have missed the deadline for self assessment which was 5th October 2024. First time doing this, so unsure if we have missed the boat for this? I know can still put the money into the SIPP until April, but we want to get the tax relief (40%) too.

She also received a message in the last couple of weeks about unpaid tax on interest in 2023-2024 and that HMRC were changing her tax code. This was paid a couple of days ago so hopefully the tax code will go back up but it's not showing on the account just yet.

I think you are confusing several things.

Firstly, you can't reduce your taxable income by contributing to a SIPP.  Contributions to a SIPP would be made using the relief at source method and that would mean her basic rate band was increased, which usually has a similar outcome overall but if you specially want to reduce her income then this won't help.

A relief at source contrition gets 25% added by the pension company and the gross contribution increases her basic rate band.

So £300 from her becomes £375 in the pension and her basic rate is increased (when she updates HMRC) by £375.

So effectively some tax relief goes into the pension and she might benefit from higher rate relief and reduce her tax liability.

Could you clarify which tax year you want to impact.

I don't understand what relevance Self Assessment has to do this.  Or the where the deadline for notifying HMRC about something for 2023-24 comes into this.

For the avoidance of doubt though, unless you have a TARDIS, there is absolutely nothing you can do now to contribute to a pension in 2023-24.

molerat

Any deposits received into a SIPP prior to 5 April will affect the 2024-25 tax year, as simple as that even if the tax credit is not added until after the end of the year.

jim._2

Dazed_and_C0nfused said:

jim._2 said:

Hi,

'Er indoors is looking to do some tax avoidance by putting money into a SIPP. The plan is reduce her taxable income down to the 20% band (in current tax year). However, I was reading that we may have missed the deadline for self assessment which was 5th October 2024. First time doing this, so unsure if we have missed the boat for this? I know can still put the money into the SIPP until April, but we want to get the tax relief (40%) too.

She also received a message in the last couple of weeks about unpaid tax on interest in 2023-2024 and that HMRC were changing her tax code. This was paid a couple of days ago so hopefully the tax code will go back up but it's not showing on the account just yet.

I think you are confusing several things.

Firstly, you can't reduce your taxable income by contributing to a SIPP.  Contributions to a SIPP would be made using the relief at source method and that would mean her basic rate band was increased, which usually has a similar outcome overall but if you specially want to reduce her income then this won't help.

A relief at source contrition gets 25% added by the pension company and the gross contribution increases her basic rate band.

So £300 from her becomes £375 in the pension and her basic rate is increased (when she updates HMRC) by £375.

So effectively some tax relief goes into the pension and she might benefit from higher rate relief and reduce her tax liability.

Could you clarify which tax year you want to impact.

I don't understand what relevance Self Assessment has to do this.  Or the where the deadline for notifying HMRC about something for 2023-24 comes into this.

For the avoidance of doubt though, unless you have a TARDIS, there is absolutely nothing you can do now to contribute to a pension in 2023-24.

I probably didn't explain that very well, plus some lack of knowledge on my behalf too.

She's currently going to be in the 40% band this current tax year. We want to put money into a SIPP - this money will paid after tax by her directly to a SIPP provider and not her employer (she retired from he FT post last summer).

How do we tell HMRC she has done this to get 40% relief? I thought that was via the pension contributions on a self assessment form?

Dazed_and_C0nfused

jim._2 said:

Dazed_and_C0nfused said:

jim._2 said:

Hi,

'Er indoors is looking to do some tax avoidance by putting money into a SIPP. The plan is reduce her taxable income down to the 20% band (in current tax year). However, I was reading that we may have missed the deadline for self assessment which was 5th October 2024. First time doing this, so unsure if we have missed the boat for this? I know can still put the money into the SIPP until April, but we want to get the tax relief (40%) too.

She also received a message in the last couple of weeks about unpaid tax on interest in 2023-2024 and that HMRC were changing her tax code. This was paid a couple of days ago so hopefully the tax code will go back up but it's not showing on the account just yet.

I think you are confusing several things.

Firstly, you can't reduce your taxable income by contributing to a SIPP.  Contributions to a SIPP would be made using the relief at source method and that would mean her basic rate band was increased, which usually has a similar outcome overall but if you specially want to reduce her income then this won't help.

A relief at source contrition gets 25% added by the pension company and the gross contribution increases her basic rate band.

So £300 from her becomes £375 in the pension and her basic rate is increased (when she updates HMRC) by £375.

So effectively some tax relief goes into the pension and she might benefit from higher rate relief and reduce her tax liability.

Could you clarify which tax year you want to impact.

I don't understand what relevance Self Assessment has to do this.  Or the where the deadline for notifying HMRC about something for 2023-24 comes into this.

For the avoidance of doubt though, unless you have a TARDIS, there is absolutely nothing you can do now to contribute to a pension in 2023-24.

I probably didn't explain that very well, plus some lack of knowledge on my behalf too.

She's currently going to be in the 40% band this current tax year. We want to put money into a SIPP - this money will paid after tax by her directly to a SIPP provider and not her employer (she retired from he FT post last summer).

How do we tell HMRC she has done this to get 40% relief? I thought that was via the pension contributions on a self assessment form?

What criteria does she meet to need to file a return?

If none then she just needs to notify HMRC, probably by letter with evidence but a phone call might work.

I presume you realise that there is no "extra 20%".  This is common misconception.  If she is paying higher rate tax on say £500 then that will limit her higher rate relief, paying say £5,000 (gross) doesn't mean it's an automatic £1,000 tax saving.

There can be additional benefits though, she might become eligible for Marriage Allowance or get an increased savings nil rate band (£1,000 instead of £500).

jim._2

Dazed_and_C0nfused said:

 What criteria does she meet to need to file a return?

If none then she just needs to notify HMRC, probably by letter with evidence but a phone call might work.

I presume you realise that there is no "extra 20%".  This is common misconception.  If she is paying higher rate tax on say £500 then that will limit her higher rate relief, paying say £5,000 (gross) doesn't mean it's an automatic £1,000 tax saving.

There can be additional benefits though, she might become eligible for Marriage Allowance or get an increased savings nil rate band (£1,000 instead of £500).

We're definitely wanting to get the PSA up to £1,000

She's going to be over the £50270 (or £37,700 is maybe a better way to put it assuming £12,570 allowance).

Let's say she'll have income of £52K plus £2K interest totally £54K. The plan would be to put say £4K into s SIPP. Doing this would bring her down to 20% (correct?). It would also increase her PSA to £1K meaning tax would only be payable on £1K (not £1.5K) and at 20%. (doing nothing, some income would be taxed at 40%).

Her tax codes (24/25) are a bit complicated as she has salary up to the summer, then replaced by a work pension and also has some other employment. She has a BR code, an LX code and an adjustment to band amount. She has a now ended salary from her FT job. There's also a deduction for unpaid tax on interest from 23/24 - this was paid this week so presumably will be removed and new tax codes issued soon.

The goal is to get back into the 20% tax band by paying money into a SIPP. We can get a reasonably accurate calculation of all income including bank interest in 24/25. In simplistic terms, my understanding is to put anything over £50K into a SIPP and maybe add an extra £1K to capture some interest or smaller amount if earnings we maybe missed. Will that work? What about the adjustment to rate amount - is there another calculation to factor this in?

Question has moved on a bit, but good to know we just need to tell HMRC and provide some evidence of the amount put into a SIPP. I assume they refund any over tax initially paid on the money paid into the SIPP?

Albermarle

Question has moved on a bit, but good to know we just need to tell HMRC and provide some evidence of the amount put into a SIPP. I assume they refund any over tax initially paid on the money paid into the SIPP?

You need to inform them of the amount of gross contribution she makes. That means the amount she adds + the basic rate tax relief added by the provider.
So if she adds £4K, the provider will add £1K, and she should report £5K.

If when they calculate her tax for 24/25 ( usually around September) she is owed a refund they will inform her and send her a payment.
Then they will adjust her tax code on the basis she will make the same contribution in 25/26. So then she will pay less tax during the year and no refund later.

jim._2

Albermarle said:

Question has moved on a bit, but good to know we just need to tell HMRC and provide some evidence of the amount put into a SIPP. I assume they refund any over tax initially paid on the money paid into the SIPP?

You need to inform them of the amount of gross contribution she makes. That means the amount she adds + the basic rate tax relief added by the provider.
So if she adds £4K, the provider will add £1K, and she should report £5K.

If when they calculate her tax for 24/25 ( usually around September) she is owed a refund they will inform her and send her a payment.
Then they will adjust her tax code on the basis she will make the same contribution in 25/26. So then she will pay less tax during the year and no refund later.

She will almost certainly be a basic rate tax payer in 25/26 so we won't have that worry. 

Dazed_and_C0nfused

jim._2 said:

Dazed_and_C0nfused said:

 What criteria does she meet to need to file a return?

If none then she just needs to notify HMRC, probably by letter with evidence but a phone call might work.

I presume you realise that there is no "extra 20%".  This is common misconception.  If she is paying higher rate tax on say £500 then that will limit her higher rate relief, paying say £5,000 (gross) doesn't mean it's an automatic £1,000 tax saving.

There can be additional benefits though, she might become eligible for Marriage Allowance or get an increased savings nil rate band (£1,000 instead of £500).

We're definitely wanting to get the PSA up to £1,000

She's going to be over the £50270 (or £37,700 is maybe a better way to put it assuming £12,570 allowance).

Let's say she'll have income of £52K plus £2K interest totally £54K. The plan would be to put say £4K into s SIPP. Doing this would bring her down to 20% (correct?). It would also increase her PSA to £1K meaning tax would only be payable on £1K (not £1.5K) and at 20%. (doing nothing, some income would be taxed at 40%).

Her tax codes (24/25) are a bit complicated as she has salary up to the summer, then replaced by a work pension and also has some other employment. She has a BR code, an LX code and an adjustment to band amount. She has a now ended salary from her FT job. There's also a deduction for unpaid tax on interest from 23/24 - this was paid this week so presumably will be removed and new tax codes issued soon.

The goal is to get back into the 20% tax band by paying money into a SIPP. We can get a reasonably accurate calculation of all income including bank interest in 24/25. In simplistic terms, my understanding is to put anything over £50K into a SIPP and maybe add an extra £1K to capture some interest or smaller amount if earnings we maybe missed. Will that work? What about the adjustment to rate amount - is there another calculation to factor this in?

Question has moved on a bit, but good to know we just need to tell HMRC and provide some evidence of the amount put into a SIPP. I assume they refund any over tax initially paid on the money paid into the SIPP?

I'm not really sure what you mean by that.

There is no direct link between the tax paid on income and the tax relief added to a relief at source pension contribution.

Assuming she is only going be making contributions eligible for tax relief then the pension company will always add 25% to her (net) contribution.

When HMRC come to calculate her tax position for 2024-25 they will increase her basic rate band by the gross contribution.  Essentially more income is taxed at 20% and less at 40%.  With the potential additional benefit of having a larger savings nil rate band.

It would be sensible to leave some margin for error, worst case scenario she only gets the basic rate relief added to the pension on part of the contributions and that part doesn't increase her personal tax saving. 

Any tax overpaid will be paid to her, only the basic rate relief added by the pension company ever ends up in the pension fund.

jim._2

Dazed_and_C0nfused said:

jim._2 said:

Dazed_and_C0nfused said:

 What criteria does she meet to need to file a return?

If none then she just needs to notify HMRC, probably by letter with evidence but a phone call might work.

I presume you realise that there is no "extra 20%".  This is common misconception.  If she is paying higher rate tax on say £500 then that will limit her higher rate relief, paying say £5,000 (gross) doesn't mean it's an automatic £1,000 tax saving.

There can be additional benefits though, she might become eligible for Marriage Allowance or get an increased savings nil rate band (£1,000 instead of £500).

We're definitely wanting to get the PSA up to £1,000

She's going to be over the £50270 (or £37,700 is maybe a better way to put it assuming £12,570 allowance).

Let's say she'll have income of £52K plus £2K interest totally £54K. The plan would be to put say £4K into s SIPP. Doing this would bring her down to 20% (correct?). It would also increase her PSA to £1K meaning tax would only be payable on £1K (not £1.5K) and at 20%. (doing nothing, some income would be taxed at 40%).

Her tax codes (24/25) are a bit complicated as she has salary up to the summer, then replaced by a work pension and also has some other employment. She has a BR code, an LX code and an adjustment to band amount. She has a now ended salary from her FT job. There's also a deduction for unpaid tax on interest from 23/24 - this was paid this week so presumably will be removed and new tax codes issued soon.

The goal is to get back into the 20% tax band by paying money into a SIPP. We can get a reasonably accurate calculation of all income including bank interest in 24/25. In simplistic terms, my understanding is to put anything over £50K into a SIPP and maybe add an extra £1K to capture some interest or smaller amount if earnings we maybe missed. Will that work? What about the adjustment to rate amount - is there another calculation to factor this in?

Question has moved on a bit, but good to know we just need to tell HMRC and provide some evidence of the amount put into a SIPP. I assume they refund any over tax initially paid on the money paid into the SIPP?

I'm not really sure what you mean by that.

I mean that the money paid into the SIPP (from our bank account after tax has been taken at 40%) will have a refund of the extra 20% tax taken due to being a higher rate tax payer (prior to HMRC being informed of the SIPP payment). The SIPP will bring her back to being at 20% tax payer, so there must be some way to recoup the additional tax on the SIPP payment. 

You seem to have already answered that above, so that's for your patience in explaining that. 

Dazed_and_C0nfused

jim._2 said:

Dazed_and_C0nfused said:

jim._2 said:

Dazed_and_C0nfused said:

 What criteria does she meet to need to file a return?

If none then she just needs to notify HMRC, probably by letter with evidence but a phone call might work.

I presume you realise that there is no "extra 20%".  This is common misconception.  If she is paying higher rate tax on say £500 then that will limit her higher rate relief, paying say £5,000 (gross) doesn't mean it's an automatic £1,000 tax saving.

There can be additional benefits though, she might become eligible for Marriage Allowance or get an increased savings nil rate band (£1,000 instead of £500).

We're definitely wanting to get the PSA up to £1,000

She's going to be over the £50270 (or £37,700 is maybe a better way to put it assuming £12,570 allowance).

Let's say she'll have income of £52K plus £2K interest totally £54K. The plan would be to put say £4K into s SIPP. Doing this would bring her down to 20% (correct?). It would also increase her PSA to £1K meaning tax would only be payable on £1K (not £1.5K) and at 20%. (doing nothing, some income would be taxed at 40%).

Her tax codes (24/25) are a bit complicated as she has salary up to the summer, then replaced by a work pension and also has some other employment. She has a BR code, an LX code and an adjustment to band amount. She has a now ended salary from her FT job. There's also a deduction for unpaid tax on interest from 23/24 - this was paid this week so presumably will be removed and new tax codes issued soon.

The goal is to get back into the 20% tax band by paying money into a SIPP. We can get a reasonably accurate calculation of all income including bank interest in 24/25. In simplistic terms, my understanding is to put anything over £50K into a SIPP and maybe add an extra £1K to capture some interest or smaller amount if earnings we maybe missed. Will that work? What about the adjustment to rate amount - is there another calculation to factor this in?

Question has moved on a bit, but good to know we just need to tell HMRC and provide some evidence of the amount put into a SIPP. I assume they refund any over tax initially paid on the money paid into the SIPP?

I'm not really sure what you mean by that.

I mean that the money paid into the SIPP (from our bank account after tax has been taken at 40%) will have a refund of the extra 20% tax taken due to being a higher rate tax payer (prior to HMRC being informed of the SIPP payment). The SIPP will bring her back to being at 20% tax payer, so there must be some way to recoup the additional tax on the SIPP payment. 

You seem to have already answered that above, so that's for your patience in explaining that. 

I'm not sure you have taken on board that there is no fixed extra 20%.

The SIPP contribution might result in a 20% tax saving. It might be more than 20%.  It might be no tax saving.

You will need to do your own before and after calculations to see the impact and how it might benefit her overall.