Sole Trader (Basic Rate) - SIPP - End of year tax relief help

irishkeet1969

Hello,

I'm hoping to get some advice to help me understand the (end of year) tax relief offered to a Sole Trader on basic rate tax when opening a SIPP.

I have searched extensively online and I can't find the answer, I have found conflicting replies hence this post asking for advice

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As an example:

£22570 - earnings after deductibles
£12570 - annual tax allowance
£8000 - SIPP contribution
£2000 - Gov tax relief making it £10000
------------------------------

Am I correct in thinking that my tax return will then be adjusted to show a tax allowance of £22,570?

Which means I will be taxed nothing, I pay no tax?

I will then have a pension of £10k. My wealth is £10k higher?
------------------------------

I really appreciate any help and advice offered
thanks
irishkeet 

masonic

It is your basic rate band that is raised, reducing any liability for higher rate tax, not your personal allowance. You don't get tax relief twice. 

Isthisforreal99

irishkeet1969 said:

Hello,

I'm hoping to get some advice to help me understand the (end of year) tax relief offered to a Sole Trader on basic rate tax when opening a SIPP.

I have searched extensively online and I can't find the answer, I have found conflicting replies hence this post asking for advice

------------------------------
As an example:

£22570 - earnings after deductibles
£12570 - annual tax allowance
£8000 - SIPP contribution
£2000 - Gov tax relief making it £10000
------------------------------

Am I correct in thinking that my tax return will then be adjusted to show a tax allowance of £22,570?

Which means I will be taxed nothing, I pay no tax?

I will then have a pension of £10k. My wealth is £10k higher?
------------------------------

I really appreciate any help and advice offered
thanks
irishkeet 

Very wrong I'm afraid. It will make zero difference to your tax liability.

The only benefit to a basic rate taxpayer is the tax relief added to the contribution.

dunstonh

I'm hoping to get some advice to help me understand the (end of year) tax relief offered to a Sole Trader on basic rate tax when opening a SIPP.

Tax relief is not end of year.   Its throughout the tax year.

As an example:
£22570 - earnings after deductibles
£12570 - annual tax allowance
£8000 - SIPP contribution
£2000 - Gov tax relief making it £10000

Technically, the pension contribution is £10,000.   Relief is a reduction in what you pay, but the contribution is the gross amount.

Am I correct in thinking that my tax return will then be adjusted to show a tax allowance of £22,570?

No.

Which means I will be taxed nothing, I pay no tax?

No. 

I will then have a pension of £10k. My wealth is £10k higher?

No.

Tax relief at source for a basic rate taxpayer may cancel out the income tax but you will still pay income tax of 2k  and will get tax relief of 2k on the pension contribution.

irishkeet1969

Thank you everyone for your helpful comments so far..........

@dunstonh

I'm hoping to get some advice to help me understand the (end of year) tax relief offered to a Sole Trader on basic rate tax when opening a SIPP.

Tax relief is not end of year.   Its throughout the tax year.

Thanks and apologies I was aware of this I meant end of year accounts.

Tax relief at source for a basic rate taxpayer may cancel out the income tax but you will still pay income tax of 2k  and will get tax relief of 2k on the pension contribution.

So am I correct in thinking that as a sole trader / basic tax payer / there is no benefit to me having a SIPP?

Am I correct in thinking I put cash in and I get 20% from the gov but I then end up paying back that 20% in my end of year accounts?

NoMore

Yes, there is a benefit to the Pension, in your example, you end up with a take home of £12570 and £10k in a pension for a total of £22570, if instead you don't contribute to a pension you end up with £20570 take home.

When you come to take that pension you will get 25% of it tax free and the rest taxable, which if you remain a basic rate tax payer means you have gained at least 6.25% over not contributing to the pension and saving it elsewhere instead.

EthicsGradient

NoMore said:

Yes, there is a benefit to the Pension, in your example, you end up with a take home of £12570 and £10k in a pension for a total of £22570, if instead you don't contribute to a pension you end up with £20570 take home.

When you come to take that pension you will get 25% of it tax free and the rest taxable, which if you remain a basic rate tax payer means you have gained at least 6.25% over not contributing to the pension and saving it elsewhere instead.

Plus you may have the option to retire before State Pension age, and take up to £12,570 out of the SIPP without paying any tax on it, because it uses your Personal Allowance.

NoMore

EthicsGradient said:

NoMore said:

Yes, there is a benefit to the Pension, in your example, you end up with a take home of £12570 and £10k in a pension for a total of £22570, if instead you don't contribute to a pension you end up with £20570 take home.

When you come to take that pension you will get 25% of it tax free and the rest taxable, which if you remain a basic rate tax payer means you have gained at least 6.25% over not contributing to the pension and saving it elsewhere instead.

Plus you may have the option to retire before State Pension age, and take up to £12,570 out of the SIPP without paying any tax on it, because it uses your Personal Allowance.

Yeah, that's why I said at least a 6.25% gain, just didn't want to start going into the weeds and complicating things further.

masonic

irishkeet1969 said:

So am I correct in thinking that as a sole trader / basic tax payer / there is no benefit to me having a SIPP?

Am I correct in thinking I put cash in and I get 20% from the gov but I then end up paying back that 20% in my end of year accounts?

You owe the tax whether you pay into your SIPP or not. If you don't pay into your SIPP then you don't get any tax relief, so your £800 stays £800. So the question you should be asking yourself is are you better off with £800 in your hand or £1000 in your pension.

Marcon

Have a look at this thread https://forums.moneysavingexpert.com/discussion/6604690/tax-relief-on-pension-contributions-for-higher-rate-tax-payers#latest and in particular the post from @hugheskevi on 1 May. I think that might well help you get your head round a subject which is a minefield for the experienced, never mind those just dipping their toes in for the first time!

SVaz

Payments into a Sipp/pension are not allowable expenses so they don’t reduce your taxable income as a Sole trader.  
That’s why they don’t show as reducing profit on your self assessment.  
All they do is raise your basic rate limit by the gross amount of contributions,  useful if you stray into higher rate territory. 

Of course it’s worth paying into,  you get 25% of your pot tax free and as stated upthread,  should you retire before State pension age,  you can take nearly £17k a year income tax free.