Query re pension income, salary, SIPP and HMRC

MarlowMallard

Dazed_and_C0nfused said:

MarlowMallard said:

Don't quite see the problem here. If your salary after NHS pension is £56k and you pay £32k into a SIPP, then your taxable income from work is down to £24k, then add £27k pension is £51k taxable - so £26k of the pension is taxed at basic rate and £1k at 40%.   Comes out the same in the end. 

Personal contributions to a SIPP will not alter the op's taxable income.

They will benefit from basic rate tax relief, for example £1,000 paid by the op becomes £1,250 in the pension.  

And their basic rate band is increased by the amount of the gross contribution (£1,250 in the example above).

But they would still have the exact same taxable income.

OK thanks, I'm on salary-sacrifice so didn't realise that. But it should still wind up the same... £25.6k from post-tax income into the SIPP becomes £32k, basic-rate band increases from £38k to £70k, 40% starts above £82k, taxable income is £83k.  So after year-end there's £14.4k tax due, but he/she has gained £6.4k "free" in the SIPP,  so £8k net goes to HMRC which is the same as above.   

Admiral_Barbarossa

Taking your pension and recycling this into a SIPP will alert HMRC to limits on tax relief, currently the maximum is £3,600 per year. As you’re still paying into your pension, this could affect that pension. 

Admiral_Barbarossa

Further to my previous, HMRC will allocate a tax code to your pension first, so your salary tax code will be adjusted, reduced to reflect this. This may take a couple of months to be applied. 

Admiral_Barbarossa

MarlowMallard said:

Dazed_and_C0nfused said:

MarlowMallard said:

Don't quite see the problem here. If your salary after NHS pension is £56k and you pay £32k into a SIPP, then your taxable income from work is down to £24k, then add £27k pension is £51k taxable - so £26k of the pension is taxed at basic rate and £1k at 40%.   Comes out the same in the end. 

Personal contributions to a SIPP will not alter the op's taxable income.

They will benefit from basic rate tax relief, for example £1,000 paid by the op becomes £1,250 in the pension.  

And their basic rate band is increased by the amount of the gross contribution (£1,250 in the example above).

But they would still have the exact same taxable income.

OK thanks, I'm on salary-sacrifice so didn't realise that. But it should still wind up the same... £25.6k from post-tax income into the SIPP becomes £32k, basic-rate band increases from £38k to £70k, 40% starts above £82k, taxable income is £83k.  So after year-end there's £14.4k tax due, but he/she has gained £6.4k "free" in the SIPP,  so £8k net goes to HMRC which is the same as above.   

MarlowMallard said:

Dazed_and_C0nfused said:

MarlowMallard said:

Don't quite see the problem here. If your salary after NHS pension is £56k and you pay £32k into a SIPP, then your taxable income from work is down to £24k, then add £27k pension is £51k taxable - so £26k of the pension is taxed at basic rate and £1k at 40%.   Comes out the same in the end. 

Personal contributions to a SIPP will not alter the op's taxable income.

They will benefit from basic rate tax relief, for example £1,000 paid by the op becomes £1,250 in the pension.  

And their basic rate band is increased by the amount of the gross contribution (£1,250 in the example above).

But they would still have the exact same taxable income.

OK thanks, I'm on salary-sacrifice so didn't realise that. But it should still wind up the same... £25.6k from post-tax income into the SIPP becomes £32k, basic-rate band increases from £38k to £70k, 40% starts above £82k, taxable income is £83k.  So after year-end there's £14.4k tax due, but he/she has gained £6.4k "free" in the SIPP,  so £8k net goes to HMRC which is the same as above.   

MarlowMallard said:

Dazed_and_C0nfused said:

MarlowMallard said:

Don't quite see the problem here. If your salary after NHS pension is £56k and you pay £32k into a SIPP, then your taxable income from work is down to £24k, then add £27k pension is £51k taxable - so £26k of the pension is taxed at basic rate and £1k at 40%.   Comes out the same in the end. 

Personal contributions to a SIPP will not alter the op's taxable income.

They will benefit from basic rate tax relief, for example £1,000 paid by the op becomes £1,250 in the pension.  

And their basic rate band is increased by the amount of the gross contribution (£1,250 in the example above).

But they would still have the exact same taxable income.

OK thanks, I'm on salary-sacrifice so didn't realise that. But it should still wind up the same... £25.6k from post-tax income into the SIPP becomes £32k, basic-rate band increases from £38k to £70k, 40% starts above £82k, taxable income is £83k.  So after year-end there's £14.4k tax due, but he/she has gained £6.4k "free" in the SIPP,  so £8k net goes to HMRC which is the same as above.   

Incorrect. HMRC will see this as recycling and the limit is £3,600 per year for tax relief., that is a contribution of £2400 and the maximum of £1,200 in tax relief. My current employer had adjusted my payment into the pension to reflect my pension. 

MarlowMallard

Admiral_Barbarossa said:

Incorrect. HMRC will see this as recycling and the limit is £3,600 per year for tax relief., that is a contribution of £2400 and the maximum of £1,200 in tax relief. My current employer had adjusted my payment into the pension to reflect my pension. 

Not necessarily.  If he's earning £56k from salary and paying £32k gross into the SIPP, then he's still getting over minimum wage from salary only, so it's not a slam-dunk that it will count as recycling.  In some sal-sac companies they will let you sal-sac down to minimum wage, but not below.  Need to consult an expert I think.  

Dazed_and_C0nfused

MarlowMallard said:

Admiral_Barbarossa said:

Incorrect. HMRC will see this as recycling and the limit is £3,600 per year for tax relief., that is a contribution of £2400 and the maximum of £1,200 in tax relief. My current employer had adjusted my payment into the pension to reflect my pension. 

Not necessarily.  If he's earning £53k from salary and paying £32k gross into the SIPP, then he's still taking home close to minimum wage from salary only, so it's not a slam-dunk that it will count as recycling.  Need to consult an expert. 

Why is minimum wage relevant?

Admiral_Barbarossa

MarlowMallard said:

Admiral_Barbarossa said:

Incorrect. HMRC will see this as recycling and the limit is £3,600 per year for tax relief., that is a contribution of £2400 and the maximum of £1,200 in tax relief. My current employer had adjusted my payment into the pension to reflect my pension. 

Not necessarily.  If he's earning £53k from salary and paying £32k gross into the SIPP, then he's still taking home close to minimum wage from salary only, so it's not a slam-dunk that it will count as recycling.  Need to consult an expert. 

Correct. I missed that, you cannot earn less than than the minimum wage 

OP can put as much as they like into their SIPP, but as they’re still paying into their pension at work, tax relief is limited to £1,200 per year. I fear OP did nit pay for advice before seeing money burn a hole in their pocket. 

Purplelady65

Thank you for the comments and suggestions - much appreciated. I think I’ve got confused with how tax codes work and thought I would have to pay 40% tax on all my pension income. From what I’ve read and think I’ve understood from OPs comments I can claim the additional tax relief on the part of my salary I pay into a SIPP meaning I will then pay basic rate tax on my pension income. 

Re obtaining the tax relief I did ring HMRC at the start of 23/24 when I started paying into a SIPP and they did adjust my tax code then based on what I was proposing to pay in. However it was a much smaller sum than I’m proposing to pay in this year. I also paid in quite a lot more into the SIPP last year 24/25 due to taking on an acting up role but I haven’t done anything about that yet. I’m not sure what the usual course of action is? Should I write to them or ring them and ask for a refund or will they adjust my tax code to cover the tax relief on the additional payments? Sorry I don’t really know how this all works. 

Marcon - re your query about annual allowance and carry over the acting up role I took on last year resulted in a massive hike in 24/25 in my pension input amount (exceeding the £60k allowance) as I had 29 years service in the 1995 scheme. I tried numerous times to obtain a pension input amount statement from NHS Pensions for the previous 3 years. I kept being promised a statement from them but 6 months after my first request they said they wouldn’t provide one which was really annoying as I’d explained numerous times why I needed one. I did my own calculations (which may not be 100% correct but are in the ball park) and think I’m ok as in the previous years I had only been awarded cost of living awards so the PIA hadn’t increased by that much in the 1995 scheme but had grown in the 2015 scheme by around £20k per annum so I did have carry over for those years.

And yes, you’re correct re things may change during this year re working. With all the forthcoming workforce reductions coming in the NHS  (I am a manager in a corporate function) I may decide to go if I end up doing the jobs of 3 people or on the other hand further reduce my hours. Plus my NHS pension was incorrectly calculated so should increase by £900 and the cost of living award will be October at the earliest but back paid to April so my earnings aren’t set in stone either. The pension calculation error was confirmed to NHS Pensions by my employer’s pension team in February but all NHS Pensions can say is “we have no timescale on when the pension will be recalculated” so I could be waiting years. 

So I think from the comments the best thing to do is wait until the end of the financial year 25/26 and then claim the additional tax relief based on what I’ve paid in? It does all seem to be getting complicated. I’m wondering if I should ask a tax accountant to work it all out as I don’t want to go over the annual allowance but neither do I want to pay 40% tax on my income if I don’t need to. Thank you once again for the posts - very helpful. 

QrizB

Admiral_Barbarossa said:

Incorrect. HMRC will see this as recycling and the limit is £3,600 per year for tax relief., that is a contribution of £2400 and the maximum of £1,200 in tax relief.

Citation required.

Which specific limit are you referring here?

There's a £3600 gross contribution limit for people earning less than that, and a £10k gross limit for those who've incurred the MPAA. Neither of those work as you've described.

"Contribute £2400 and receive £1200 tax relief " would imply a 33% rate of tax?

Dazed_and_C0nfused

Admiral_Barbarossa said:

MarlowMallard said:

Admiral_Barbarossa said:

Incorrect. HMRC will see this as recycling and the limit is £3,600 per year for tax relief., that is a contribution of £2400 and the maximum of £1,200 in tax relief. My current employer had adjusted my payment into the pension to reflect my pension. 

Not necessarily.  If he's earning £53k from salary and paying £32k gross into the SIPP, then he's still taking home close to minimum wage from salary only, so it's not a slam-dunk that it will count as recycling.  Need to consult an expert. 

Correct. I missed that, you cannot earn less than than the minimum wage 

OP can put as much as they like into their SIPP, but as they’re still paying into their pension at work, tax relief is limited to £1,200 per year. I fear OP did nit pay for advice before seeing money burn a hole in their pocket. 

Where have got that idea from 🤔