SIPP contributions to get lower rate tax

Albermarle

adamjoeite said:

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.

How do you make these NHS contributions? 

adamjoeite

Albermarle said:

adamjoeite said:

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.

How do you make these NHS contributions? 

Superannuation is taken from my salary before I receive it each month. As an NHS associate dentist we are both self employed, whilst at the same time having a contact with both our practice owner and the local health board.

etienneg

[Deleted User] said:

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.

I'm quite happy to believe I am wrong, but using the link you gave I don't see anything about the effect of SIPP contributions on which tax rate band you are in, nor how this works. Even clicking on Income Tax band from within the linked page doesn't help. Could you perhaps provide a link to somewhere that does talk about this and explain exactly how PSA is determined, please?

Dazed_and_C0nfused

etienneg said:

[Deleted User] said:

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.

I'm quite happy to believe I am wrong, but using the link you gave I don't see anything about the effect of SIPP contributions on which tax rate band you are in, nor how this works. Even clicking on Income Tax band from within the linked page doesn't help. Could you perhaps provide a link to somewhere that does talk about this and explain exactly how PSA is determined, please?

This explains how relief for RAS contributions is given, they extend the basic rate band.

For savings nil rate purposes you establish your liability without the nil rate band factored in.  If you aren't a higher rate payer then you can have £1,000 interest taxed at 0%.

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/member-contributions-and-higher-rate-tax-relief/#:~:text=With the relief at source,of the gross pension contribution.

[Deleted User]

etienneg said:

[Deleted User] said:

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.

I'm quite happy to believe I am wrong, but using the link you gave I don't see anything about the effect of SIPP contributions on which tax rate band you are in, nor how this works. Even clicking on Income Tax band from within the linked page doesn't help. Could you perhaps provide a link to somewhere that does talk about this and explain exactly how PSA is determined, please?

Total taxable income is £52270, for example - you are a higher rate taxpayer. £12570 is tax free, £37700 is taxed at the basic rate, £2000 is charged at the higher rate. 

Put £1600 into a SIPP. This is grossed up to £2000. 

Now your £52270 is taxed:

£12570 tax free, £39700 at the basic rate, £0 at higher rates. You are a basic rate taxpayer.