Semi-retired, can I avoid higher-rate tax?

RSTime

I am semi-retired and have two defined benefit pensions that come to ~£47,000 per annum. I work part-time (self-employed) and earn ~£12,000 per annum. Am I able to put any of my additional funds into a pension (SIPP) to shield from higher-rate (40%) tax?

Dazed_and_C0nfused

RSTime said:

I am semi-retired and have two defined benefit pensions that come to ~£47,000 per annum. I work part-time (self-employed) and earn ~£12,000 per annum. Am I able to put any of my additional funds into a pension (SIPP) to shield from higher-rate (40%) tax?

Yes.

You will be limited by your self employment profits.  Your turnover is irrelevant, it's profit that counts.

You could add 80% of that and it will have 25% added.  For example if your profit was £8,000 then you would pay £6,400 and the basic rate relief would make it a gross contribution of £8,000.

You include details of the gross contribution on your Self Assessment return and that increases your basic rate band.  In the example above it would be £45,700 rather than £37,700.  It does not mean your self employment profits won't be taxed.

The tax savings benefits you (reducing your Self Assessment liability), it doesn't get added to your pension fund.

TheSpectator

Isn't the danger here that you are just deferring the higher rate liability to a later date?

Obviously a SIPP can be flexible in terms of what you can withdraw but with fiscal drag not looking like it will be going anywhere soon and I assume your DB pension increasing by inflation then very soon you could be into higher rate tax on your pensions alone and therefore any SIPP withdrawals (excluding TFLS) being taxable at higher rate, maybe even more than todays 40%. Also, you don't mention state pension - when does that kick in?

Suppose the question, as above, is how much actual profit do you have that is subject to 40%?

jimi_man

TheSpectator said:

Isn't the danger here that you are just deferring the higher rate liability to a later date?

Obviously a SIPP can be flexible in terms of what you can withdraw but with fiscal drag not looking like it will be going anywhere soon and I assume your DB pension increasing by inflation then very soon you could be into higher rate tax on your pensions alone and therefore any SIPP withdrawals (excluding TFLS) being taxable at higher rate, maybe even more than todays 40%. Also, you don't mention state pension - when does that kick in?

Suppose the question, as above, is how much actual profit do you have that is subject to 40%?

This.

I did the same for about 8 years and built up a reasonable fund and never paid HR tax. However come SPA I'll be an HR tax payer so I'm now in the process of taking it all out over the next seven years to make the most of the tax enhancements.

It sounds like there may be less scope for you to do that? 

RSTime

I don't receive state pension for another 5 years and my profit will be ~£8k. I guess the benefits are borderline and as you mention with inflation and fiscal drag I am likely to pay HR tax within 2 years with my pensions alone. 

FIREDreamer

Unless you need tne extra funds I would just retire now. No point working if you only keep 60% of the proceeds, unless you really have to.

ali_bear

You can keep working and earning if you want to. But it sounds like you will be paying 40% tax on some of that income.

Triumph13

The only* benefit you'll get is the TFLS, and obviously you want to fully use your 20% band, so that's £5k of earnings you could put in for a net profit of £500 by the time you take it back out (40% tax avoided on 1/4 of £5k).  Better than a poke in the eye, but not earth shattering.  You'd presumably do marginally better next year as you'd put a little more into the SIPP as your DB's will take up more of the 20% band.

*Assuming it doesn't impact you for student loans / parental contributions, Personal Savings Allowance, etc.