Is opening a SIPP the answer?

Gimmeaminute

I'm currently 57 and in full time employment with the NHS. I have one LGPS DB in payment and plan to take the NHS DP in 10 years or hopefully much sooner if circumstances are good.

As things stand, I am going to be in the higher rate tax band in Scotland from this year onwards, so tax on over £43,663 will be paid at 42%. This also means that all savings income over £500pa outside of isas will be heavily taxed too.

What I would like to do is get my taxable income under the higher rate threshold so that my tax liability goes down and I can earn up to £1000pa on savings on cash outside of isas.

So, what I am thinking of doing is to open a sipp now and put sufficient cash in each year to bring my taxable income under £43,663, this way if I do decide to leave work before 67, I can withdraw from the sipp at 21% tax and live off that and my LGPS pension.

Is this even a thing and is it this easy? Do I then just need to fill in a document for HMRC each year and let them sort everything out in their own time or is there a better process?

I have filled out a request on the SPPA website for advice but heard nothing after over a month, so trying to be proactive.

Any advice/suggestions would be appreciated.

El_Torro

Yes, paying into a SIPP in order to reduce your taxable income is relatively straightforward. Not sure about the bit about contacting HMRC as I do a self assessment every year and sort it out that way. It should be pretty simple though.

Since you are already paying into an NHS pension it might be possible to pay AVCs into that instead. Have you looked into that? It might be more advantageous than paying into a SIPP. 

NoMore

Yes it’s a thing and is quite common. It’s not difficult to claim the tax back. With a sipp you will have to choose your own investments which maybe new to you if you haven’t had dc pension before 

 You  may want to investigate your options with the nhs pension first. They should have options for avc or buying extra years. I’m not familiar with the ins and outs of the nhs scheme but somebody on here will be. 

Gimmeaminute

Thanks both for the quick responses. I had looked at AVCs a few years ago and decided that they were not for me. However having looked at them again now, despite being forced to use Standard Life, the NHS will make the payments from my gross salary, thus making the process probably very much easier as they can report things to HMRC and save me from having to do it.

Marcon

Gimmeaminute said:

Thanks both for the quick responses. I had looked at AVCs a few years ago and decided that they were not for me. However having looked at them again now, despite being forced to use Standard Life, the NHS will make the payments from my gross salary, thus making the process probably very much easier as they can report things to HMRC and save me from having to do it.

If that's the only reason, it's not a very good one (however understandable!). You don't have to do a full self assessment tax return, but simply do it online: https://www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments

Gimmeaminute

Marcon said:

Gimmeaminute said:

Thanks both for the quick responses. I had looked at AVCs a few years ago and decided that they were not for me. However having looked at them again now, despite being forced to use Standard Life, the NHS will make the payments from my gross salary, thus making the process probably very much easier as they can report things to HMRC and save me from having to do it.

If that's the only reason, it's not a very good one (however understandable!). You don't have to do a full self assessment tax return, but simply do it online: https://www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments

Thanks @Marcon. I've never paid tax on savings before as I've always kept interest under £1000. Do you know how I go about keeping that as it looks like a separate process from declaring earnings?

Marcon

Gimmeaminute said:

Marcon said:

Gimmeaminute said:

Thanks both for the quick responses. I had looked at AVCs a few years ago and decided that they were not for me. However having looked at them again now, despite being forced to use Standard Life, the NHS will make the payments from my gross salary, thus making the process probably very much easier as they can report things to HMRC and save me from having to do it.

If that's the only reason, it's not a very good one (however understandable!). You don't have to do a full self assessment tax return, but simply do it online: https://www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments

Thanks @Marcon. I've never paid tax on savings before as I've always kept interest under £1000. Do you know how I go about keeping that as it looks like a separate process from declaring earnings?

Do you mean 'keeping' (as in 'keeping under...') or 'reporting'? If the latter, the good news is that the payer of interest reports direct to HMRC. If necessary your tax code is adjusted, or you are sent a bill from HMRC - see https://www.gov.uk/apply-tax-free-interest-on-savings for more info.

Gimmeaminute

Marcon said:

Gimmeaminute said:

Marcon said:

Gimmeaminute said:

Thanks both for the quick responses. I had looked at AVCs a few years ago and decided that they were not for me. However having looked at them again now, despite being forced to use Standard Life, the NHS will make the payments from my gross salary, thus making the process probably very much easier as they can report things to HMRC and save me from having to do it.

If that's the only reason, it's not a very good one (however understandable!). You don't have to do a full self assessment tax return, but simply do it online: https://www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments

Thanks @Marcon. I've never paid tax on savings before as I've always kept interest under £1000. Do you know how I go about keeping that as it looks like a separate process from declaring earnings?

Do you mean 'keeping' (as in 'keeping under...') or 'reporting'? If the latter, the good news is that the payer of interest reports direct to HMRC. If necessary your tax code is adjusted, or you are sent a bill from HMRC - see https://www.gov.uk/apply-tax-free-interest-on-savings for more info.

What I do want to understand is how the system works so I can ensure that I don't have to pay 42% tax on interest over £500. I don't want to give HMRC £210 of my cash because I haven't researched enough. I currently have a few non isa, high interest accounts paying me £900+ pa in interest. I need to try to protect this or just put everything into lower paying isas and not worry about tax.

As I said, unfortunately I have always been an employee and never received more than £1000 in savings interest before, so I have no idea how the system works and what I need to do to protect as much of my income as I can.

Marcon

Gimmeaminute said:

Marcon said:

Gimmeaminute said:

Marcon said:

Gimmeaminute said:

Thanks both for the quick responses. I had looked at AVCs a few years ago and decided that they were not for me. However having looked at them again now, despite being forced to use Standard Life, the NHS will make the payments from my gross salary, thus making the process probably very much easier as they can report things to HMRC and save me from having to do it.

If that's the only reason, it's not a very good one (however understandable!). You don't have to do a full self assessment tax return, but simply do it online: https://www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments

Thanks @Marcon. I've never paid tax on savings before as I've always kept interest under £1000. Do you know how I go about keeping that as it looks like a separate process from declaring earnings?

Do you mean 'keeping' (as in 'keeping under...') or 'reporting'? If the latter, the good news is that the payer of interest reports direct to HMRC. If necessary your tax code is adjusted, or you are sent a bill from HMRC - see https://www.gov.uk/apply-tax-free-interest-on-savings for more info.

What I do want to understand is how the system works so I can ensure that I don't have to pay 42% tax on interest over £500. I don't want to give HMRC £210 of my cash because I haven't researched enough. I currently have a few non isa, high interest accounts paying me £900+ pa in interest. I need to try to protect this or just put everything into lower paying isas and not worry about tax.

As I said, unfortunately I have always been an employee and never received more than £1000 in savings interest before, so I have no idea how the system works and what I need to do to protect as much of my income as I can.

Don't forget the merits of Give As You Earn, not least the ability to choose to have a contribution treated as being made in the previous tax year (unlike pensions, where you can't do that). See https://www.gov.uk/donating-to-charity/gift-aid

Dazed_and_C0nfused

Gimmeaminute said:

Marcon said:

Gimmeaminute said:

Marcon said:

Gimmeaminute said:

Thanks both for the quick responses. I had looked at AVCs a few years ago and decided that they were not for me. However having looked at them again now, despite being forced to use Standard Life, the NHS will make the payments from my gross salary, thus making the process probably very much easier as they can report things to HMRC and save me from having to do it.

If that's the only reason, it's not a very good one (however understandable!). You don't have to do a full self assessment tax return, but simply do it online: https://www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments

Thanks @Marcon. I've never paid tax on savings before as I've always kept interest under £1000. Do you know how I go about keeping that as it looks like a separate process from declaring earnings?

Do you mean 'keeping' (as in 'keeping under...') or 'reporting'? If the latter, the good news is that the payer of interest reports direct to HMRC. If necessary your tax code is adjusted, or you are sent a bill from HMRC - see https://www.gov.uk/apply-tax-free-interest-on-savings for more info.

What I do want to understand is how the system works so I can ensure that I don't have to pay 42% tax on interest over £500. I don't want to give HMRC £210 of my cash because I haven't researched enough. I currently have a few non isa, high interest accounts paying me £900+ pa in interest. I need to try to protect this or just put everything into lower paying isas and not worry about tax.

As I said, unfortunately I have always been an employee and never received more than £1000 in savings interest before, so I have no idea how the system works and what I need to do to protect as much of my income as I can.

The good news is that the Scottish government doesn't have powers relating to the taxation of interest so you won't have to pay 42% on it.

The tax rates for interest are 0% (twice), 20%, 40% and 45%.

The Scottish higher rate threshold is also irrelevant when it comes to interest.  You might find this a useful read, in particular the Gus example.

https://www.litrg.org.uk/tax-nic/income-tax/scottish-income-tax/scottish-income-tax-more-detail

Finally contributing to a SIPP will not reduce your taxable income.

You will receive basic rate tax relief from the pension company, so for example £800 you pay becomes £1,000 within the pension.  Being a Scottish resident for tax purposes does not change that.

But your basic rate band will be increased by the amount of the gross contributions.  Meaning less income is taxed at the intermediate and higher rates.  Any personal tax saving you get from a SIPP contribution comes back to you, it is never added to your pension fund.