SIPP tax relief

seans_elysees

I’m driving myself crazy and know I’m doing something wrong in trying to figure out how SIPP tax relief works. Say for simplicity I am a 20% tax payer. 

If I pay tax on £10k of earnings, I would have £8k net. (Ignoring NI for simplifying example). 

If I contribute £8k into a SIPP, I’d receive 20% top up of £1600. 

Why does that leave a gap of £400 compared to if I’d contributed to a company pension where I’m getting relief at source? 

bjorn_toby_wilde

You’d get £2000 tax relief, not £1600.

You’re calculating 20% of the net amount after tax when you should be using 20% of the gross amount before tax.

seans_elysees

bjorn_toby_wilde said:

You’d get £2000 tax relief, not £1600.

You’re calculating 20% of the net amount after tax when you should be using 20% of the gross amount before tax.

Thanks. I don’t know why I thought I’d picked up on the top up being based on 20% of the contribution amount. 

bjorn_toby_wilde

It’s an easy mistake to make

dunstonh

If I pay tax on £10k of earnings, I would have £8k net. (Ignoring NI for simplifying example). 

NI doesnt come into it.  You have 10k gross and that is the figure that matters.

If I contribute £8k into a SIPP, I’d receive 20% top up of £1600. 

If you contribute 8k into a pension, you don't get a top up.  You get relief.    It is 20% relief.   So, £8k into a pension would require a cheque or bank transfer of £6,400.    If you meant £10k into a pension then you would pay £8k.

Why does that leave a gap of £400 compared to if I’d contributed to a company pension where I’m getting relief at source?

Because you are treating it is a bonus and not a relief.

I don’t know why I thought I’d picked up on the top up being based on 20% of the contribution amount. 

The relief is based on 20% of the contribution amount.  

Sarahspangles

seans_elysees said:

If I pay tax on £10k of earnings, I would have £8k net

If I contribute £8k into a SIPP, I’d receive 20% top up of £1600. 

 

You could rephrase your second sentence as:

If I contribute £10k into a SIPP, £2k of it will be tax relief.