Withdraw money to pay into pension, to rescue tax?

Cam93

Hi all,

after some advice as I’m fighting myself on this one but I think I know the answer. 

I’m 31, currently have est 32k in S&S isa and 35k in a SIPP. Plus 10-12k float / cash flow at hand. 

I’m self employed and this year my earning have increased by about 15k to previous years which is great, however it will also have a knock on effect with my self assessment and child benefits. 

I can get my earnings down to about 70k with expenses but this would still put me over the 60k threshold for child allowances and high rate tax

this bring me onto my possible solution - moving 11k from my isa into my sipp which would make earnings of 59k below the threshold. 

I’m aware I would also get the tax back paid on this money so my 11k would turn into est 13.5k however i changed my investing stater favouring isa over sipp due to not having to pay income tax when withdrawing form and isa and also the fact that the isa I can withdraw from in event of an emergency however once its in the sipp I can’t touch it and will be taxed at my rate when drawing down in later life. 

My current plan was to maximise my isa every year and then at 50 clear my mortgage and partially retire so this reduction of 11k could set that back a few years. So it goes against the grain abit. 

ISA currently returns about 18% PA and SIPP currently 15% PA so that’s also another reason for behind hesitant. 

Kind regards 

Isthisforreal99

Paying 11k into a pension would not reduce your earnings to £59k - it will affect your Net Adjusted Income. If you paid £8000 into a private pension the gross amount with tax relief would be £10000 which would reduce your Net Adjusted Income to £60k.

Pension beats ISA, £31k at 31 seems low - the way you are going you won't have to worry about tax when you withdraw as you won't have enough to pay tax.

dunstonh

 however i changed my investing stater favouring isa over sipp due to not having to pay income tax when withdrawing form and isa and also the fact that the isa I can withdraw from in event of an emergency however once its in the sipp I can’t touch it and will be taxed at my rate when drawing down in later life. 

At basic rate tax, the pension is 6.25% better than an ISA.  Yes you pay tax on the way out but the relief you get on the way in means you are better off than the ISA.     For contributions in the higher rate band or if you retire earlier than state pension age and have no other income, the benefit of the pension is even more.

Cam93

Isthisforreal99 said:

Paying 11k into a pension would not reduce your earnings to £59k - it will affect your Net Adjusted Income. If you paid £8000 into a private pension the gross amount with tax relief would be £10000 which would reduce your Net Adjusted Income to £60k.

Pension beats ISA, £31k at 31 seems low - the way you are going you won't have to worry about tax when you withdraw as you won't have enough to pay tax.

I’m CIS so 11k would be an ‘expense’ reduction as already paid a flat 20% on the 11k as its all income. the SIPP then reimburses the tax as it comes from a personal account not from a business. Hence the 11k plus  25% tax reimbursement gives £13,750 into the account. 

Yes aware pension is low - as mentioned above my strategy is aimed more at investing in ISA S&S for flexibility rather than SIPP which is inaccessible 

QrizB

Cam93 said:

Yes aware pension is low - as mentioned above my strategy is aimed more at investing in ISA S&S for flexibility rather than SIPP which is inaccessible 

FWIW I disagree with the poster who says £31k of pension at age 31 is low; it's more than the average of £18800 for age band 25-34 (ONS data quoted by Moneyweek):

https://moneyweek.com/personal-finance/pensions/average-pension-pot-by-age

Isthisforreal99

Cam93 said:

Isthisforreal99 said:

Paying 11k into a pension would not reduce your earnings to £59k - it will affect your Net Adjusted Income. If you paid £8000 into a private pension the gross amount with tax relief would be £10000 which would reduce your Net Adjusted Income to £60k.

Pension beats ISA, £31k at 31 seems low - the way you are going you won't have to worry about tax when you withdraw as you won't have enough to pay tax.

I’m CIS so 11k would be an ‘expense’ reduction as already paid a flat 20% on the 11k as its all income. the SIPP then reimburses the tax as it comes from a personal account not from a business. Hence the 11k plus  25% tax reimbursement gives £13,750 into the account. 

It absolutely is not an expense reduction. It extends your basic rate band and is a deduction in calculating your Net Adjusted Income for child benefit purposes but it does not reduce your taxable income.

Isthisforreal99

QrizB said:

Cam93 said:

Yes aware pension is low - as mentioned above my strategy is aimed more at investing in ISA S&S for flexibility rather than SIPP which is inaccessible 

FWIW I disagree with the poster who says £31k of pension at age 31 is low; it's more than the average of £18800 for age band 25-34 (ONS data quoted by Moneyweek):

https://moneyweek.com/personal-finance/pensions/average-pension-pot-by-age

'Better than average' doesn't make it great?

QrizB

Isthisforreal99 said:

QrizB said:

Cam93 said:

Yes aware pension is low - as mentioned above my strategy is aimed more at investing in ISA S&S for flexibility rather than SIPP which is inaccessible 

FWIW I disagree with the poster who says £31k of pension at age 31 is low; it's more than the average of £18800 for age band 25-34 (ONS data quoted by Moneyweek):

https://moneyweek.com/personal-finance/pensions/average-pension-pot-by-age

'Better than average' doesn't make it great?

Nice straw man you've got there.

No-one is claiming it's great.

Better than average, however, is unlikely to count as "low" - especially as the average excludes people with zero pension savings.

Dazed_and_C0nfused

Cam93 said:

Isthisforreal99 said:

Paying 11k into a pension would not reduce your earnings to £59k - it will affect your Net Adjusted Income. If you paid £8000 into a private pension the gross amount with tax relief would be £10000 which would reduce your Net Adjusted Income to £60k.

Pension beats ISA, £31k at 31 seems low - the way you are going you won't have to worry about tax when you withdraw as you won't have enough to pay tax.

I’m CIS so 11k would be an ‘expense’ reduction as already paid a flat 20% on the 11k as its all income. the SIPP then reimburses the tax as it comes from a personal account not from a business. Hence the 11k plus  25% tax reimbursement gives £13,750 into the account. 

Yes aware pension is low - as mentioned above my strategy is aimed more at investing in ISA S&S for flexibility rather than SIPP which is inaccessible 

It wouldn't be a business expense and it wouldn't reduce your taxable income.

You would get basic rate relief added to it by the pension company and it does reduce your adjusted net income (used for calculating the High Income Child Benefit Charge).

Have you considered all your taxable income when working out what your adjusted net income might be?