SIPP contributions, to reduce 40% tax paid.

jay1804

Hi everyone,

I’d like to know how much I can contribute to a SIPP to reduce the amount of tax I pay at the 40% rate.

Should I base my contributions on my gross pay or taxable pay from my payslips for earnings above £50,271?  Also, do I need to include interest income when calculating this?

Thanks in advance.

ali_bear

It is the gross pension contribution that reduces the amount you have to pay income tax on. 

DRS1

Yes include interest income (and any other taxable income like dividends or rent)

Dazed_and_C0nfused

ali_bear said:

It is the gross pension contribution that reduces the amount you have to pay income tax on. 

As the op is talking about making a contribution to their SIPP it is very unlikely that it will have an impact on the amount of income they have to pay tax on.

It will increase their basic rate band and can move income from being taxed at the higher rate to basic rate but unless tapered Personal Allowance is involved it's not going reduce the amount of income they have to pay tax on.

Yorkie1

Your taxable pay, plus untaxed savings interest (which is pretty much all of it) and any other income is added together.

So, (making up numbers here), if your gross pay was £52K, but your taxable pay was £50K, you'd be a basic rate tax payer. If you had £3K savings interest, you'd be back up to £53K income and thus a higher rate tax payer. 

As you say, pension contributions or Gift Aid, for example, will bring you back into basic rate territory.

jay1804

So for example if my taxable income was 59,800.00 and I will earn £600 in interest . My total income for the year would be £60,400.

Then if I contributed £8,103.20 to a SIPP, I would receive £2,025.80 (Basic Tax Relief) and be able to claim back £2,025.80 (Higher Tax Relief) from HMRC?

Dazed_and_C0nfused

jay1804 said:

So for example if my taxable income was 59,800.00 and I will earn £600 in interest . My total income for the year would be £60,400.

Then if I contributed £8,103.20 to a SIPP, I would receive £2,025.80 (Basic Tax Relief) and be able to claim back £2,025.80 (Higher Tax Relief) from HMRC?

No.  You can only claim higher rate relief on the higher rate tax you would normally have paid.

If your taxable earnings were £59,800 then you would usually just have paid 40% tax on £9,630 of that.  And on £100 of the interest.

So unless there is some relevant information you have not so far disclosed your higher rate savings would be limited to 9,730 x 20% (1,946).

Have you checked the personal tax saving if you contributed an extra £1 (gross).

af1963

Don't forget to include the value of any work related taxable benefits.

You're allowed to contribute (gross, after tax relief has been added) anything up to your total earnings from work.  So you won't start to hit any limits on contributions with the approximate size of contributions you are asking about. 

All that will happen is that if you put in more than the amount that will qualify to reclaim the extra higher rate relief, the excess amount will "only" get standard 20% relief. Which is still a good deal.

If avoiding higher rate is important to you - maybe to allow you £1000 of personal savings allowance instead of the £500 that higher rate payers get - it's better to err on the side of contributing a little more.