SIPP contribution limit

aroominyork

Dazed_and_C0nfused said:

QrizB said:

aroominyork said:

Really, even though the Marriage Allowance would reduce her taxable income... and hence there would be less paid tax for her to reclaim through SIPP contributions?

It doesn't reduce her income, it increases her personal allowance. That's an important difference.

It doesn't do that either, it gives her a tax credit (deduction) worth upto £252.

But what is the effect on the amount she can pay into a SIPP?

QrizB

aroominyork said:

Dazed_and_C0nfused said:

QrizB said:

aroominyork said:

Really, even though the Marriage Allowance would reduce her taxable income... and hence there would be less paid tax for her to reclaim through SIPP contributions?

It doesn't reduce her income, it increases her personal allowance. That's an important difference.

It doesn't do that either, it gives her a tax credit (deduction) worth upto £252.

But what is the effect on the amount she can pay into a SIPP?

No effect whatsoever.

aroominyork

QrizB said:

She could choose to not claim the trading allowance, and then you could pay £4800 in. This might leave you better off overall; check for yourself.

I've thought about this more and there is a net tax benefit to not using the trading allowance only if the SIPP-invested funds grow in value. In the example below, the top half shows no growth in SIPP value. Net funds after drawdown are £5250 if trading allowance is used - £4250 from SIPP and the £1000 trading allowance retained at the outset - and £5100 if trading allowance is not used. The wheeze fails. 

In the bottom half, assume the SIPP grows by 50%. Using the trading allowance results in £7375; not using it results in £7650. The wheeze works. 

The breakeven SIPP growth is about 17.5%. You can also choose to take into account that using the trading allowance gives you £1000 cash in hand from Day 1 rather than 'returning' that money to you only after drawdown.

QrizB

aroominyork said:

QrizB said:

She could choose to not claim the trading allowance, and then you could pay £4800 in. This might leave you better off overall; check for yourself.

I've thought about this more and there is a net tax benefit to not using the trading allowance only if the SIPP-invested funds grow in value. In the example below, the top half shows no growth in SIPP value. Net funds after drawdown are £5250 if trading allowance is used - £4250 from SIPP and the £1000 trading allowance retained at the outset - and £5100 if trading allowance is not used. The wheeze fails. 

In the bottom half, assume the SIPP grows by 50%. Using the trading allowance results in £7375; not using it results in £7650. The wheeze works. 

Trading allowance doesn't save you £1000 - it saves you the tax on £1000, which is £200 (assuming a basic rate taxpayer).

So in the top box, you're comparing £4250+£200=£4450 to £5100.

(That still doesn't look right but it's late and I'm tired. Might come back to it tomorrow.)

aroominyork

I think it's correct but I overcomplicated it. Ignore the first five lines in yesterday's Excel. Left side panels: use TA, pay £5k gross into SIPP, have untaxed £1k in hand. Right side panels: do not use TA, pay £6k into SIPP.