SIPP contributions to get lower rate tax

adamjoeite

With income of £88k and bank interest of £1.5k, I would like if possible to reduce my tax band to lower rate. My tired brain is struggling so  could anyone help me in calculating what SIPP contributions would be needed to facilitate this?

Dazed_and_C0nfused

adamjoeite said:

With income of £88k and bank interest of £1.5k, I would like if possible to reduce my tax band to lower rate. My tired brain is struggling so  could anyone help me in calculating what SIPP contributions would be needed to facilitate this?

Are you Scottish resident for tax purposes?

adamjoeite

No, Northern Irish

[Deleted User]

adamjoeite said:

No, Northern Irish

That would require a contribution to a SIPP of £31384 which will be grossed up to £39230 by HMRC. I would be giving myself some headroom though. If it’s for 2024/25 tax year that has to be done today. 

You would then inform HMRC of the gross contribution of £39230 to obtain additional relief of £7846. 

All of your income above the personal allowance would be charged at 20%. 

Grumpy_chap

adamjoeite said:

With income of £88k 

Is that earned income?

Albermarle

Are you employed and already making some pension contributions to your workplace pension?

adamjoeite

[Deleted User] said:

adamjoeite said:

No, Northern Irish

That would require a contribution to a SIPP of £31384 which will be grossed up to £39230 by HMRC. I would be giving myself some headroom though. If it’s for 2024/25 tax year that has to be done today. 

You would then inform HMRC of the gross contribution of £39230 to obtain additional relief of £7846. 

All of your income above the personal allowance would be charged at 20%. 

Thank you, I think that was somewhere along the lines of what I was assuming. More than I was planning on putting in, but it would be nice to get out of the higher rate bracket. Would that also mean I pay 20% on the interest earned above £1k as opposed to 40% on interest about £500?

adamjoeite

Grumpy_chap said:

adamjoeite said:

With income of £88k 

Is that earned income?

Yes I've taken off expenses but I realise I've forgotten to take off charitable donations so it should come down a little. My income increased somewhat this past tax year which is why I'm trying to make sure I've got the calculations right before the end of today.

adamjoeite

Albermarle said:

Are you employed and already making some pension contributions to your workplace pension?

I am technically self-employed (file my own returns) but I do also make contributions into an NHS pension scheme. Are you wondering about whether I would be going over annual allowance? It's something I'm wondering as well, as if I were to pay into my SIPP to drop into BR, I think I would go over this year's AA, so I'd need to look into and try to understand the 3 year rule I think.

etienneg

adamjoeite said:

[Deleted User] said:

That would require a contribution to a SIPP of £31384 which will be grossed up to £39230 by HMRC. I would be giving myself some headroom though. If it’s for 2024/25 tax year that has to be done today. 

You would then inform HMRC of the gross contribution of £39230 to obtain additional relief of £7846. 

All of your income above the personal allowance would be charged at 20%. 

Thank you, I think that was somewhere along the lines of what I was assuming. More than I was planning on putting in, but it would be nice to get out of the higher rate bracket. Would that also mean I pay 20% on the interest earned above £1k as opposed to 40% on interest about £500?

My understanding is that your PSA would remain at £500, not increase to £1,000. It's possible that i am wrong with this, and if so I would appreciate being corrected.

My understanding is that SIPP contributions do not reduce your earnings, but rather extend the basic rate tax range. (Payment into a pension by salary sacrifice could achieve a change in your PSA, as then you are agreeing to a salary reduction in exchange for higher employer pension contribtutions.) In other words, I think the sum of your salary, savings interest and dividends determines your PSA and thereafter this cannot be altered.

[Deleted User]

etienneg said:

adamjoeite said:

[Deleted User] said:

That would require a contribution to a SIPP of £31384 which will be grossed up to £39230 by HMRC. I would be giving myself some headroom though. If it’s for 2024/25 tax year that has to be done today. 

You would then inform HMRC of the gross contribution of £39230 to obtain additional relief of £7846. 

All of your income above the personal allowance would be charged at 20%. 

Thank you, I think that was somewhere along the lines of what I was assuming. More than I was planning on putting in, but it would be nice to get out of the higher rate bracket. Would that also mean I pay 20% on the interest earned above £1k as opposed to 40% on interest about £500?

My understanding is that your PSA would remain at £500, not increase to £1,000. It's possible that i am wrong with this, and if so I would appreciate being corrected.

My understanding is that SIPP contributions do not reduce your earnings, but rather extend the basic rate tax range. (Payment into a pension by salary sacrifice could achieve a change in your PSA, as then you are agreeing to a salary reduction in exchange for higher employer pension contribtutions.) In other words, I think the sum of your salary, savings interest and dividends determines your PSA and thereafter this cannot be altered.

It is indeed possible that you are wrong. The PSA is specifically determined by the tax rate band that you are in. 

https://www.gov.uk/apply-tax-free-interest-on-savings

Personal Savings Allowance

You may also get up to £1,000 of interest and not have to pay tax on it, depending on which Income Tax band you’re in. This is your Personal Savings Allowance.