Maximising Higher Rate Tax Relief When Opening First SIPP

Gambler

I have a DC workplace pension with Scottish Widows which is matched by my employer at 7% which I have been paying into since 2004.

I'm now 54 and want to pay in a lump sum in this financial year but I'm think of opening a SIPP rather than adding to workplace scheme.

I want to maximise higher rate tax relief which I believe I can do by reducing my adjusted taxable income to £50,270. This would also have the added benefit of increasing my PSA from £500 to £1000.

Can I just double check how I calculate the amount to put in the SIPP to maximise higher rate tax relief.

Currently my income is impacted by approximately:

Salary £100K
Private Health Insurance £2.5K
Professional Subs £0.5K
Gift Aid £1K

I've also been researching SIPP providers and was surprised to learn that there can be a delay of 6-8 weeks before basic rate tax relief is added. What would happen if this was added ion a different tax year?

I'm leaning towards SW as they do offer immediate relief.

Many thanks

SacredStephan

Gambler said:

 been researching SIPP providers and was surprised to learn that there can be a delay of 6-8 weeks before basic rate tax relief is added. What would happen if this was added in a different tax year?

Tax relief is treated as being added to the pot in the same tax year as the contribution.

Marcon

Gambler said:

I've also been researching SIPP providers and was surprised to learn that there can be a delay of 6-8 weeks before basic rate tax relief is added. What would happen if this was added ion a different tax year?

I'm leaning towards SW as they do offer immediate relief.

Many thanks

Tax relief will be attributed to the tax year in which the contribution is paid, so 'nothing' would happen.

Albermarle

I've also been researching SIPP providers and was surprised to learn that there can be a delay of 6-8 weeks before basic rate tax relief is added. What would happen if this was added ion a different tax year?

I'm leaning towards SW as they do offer immediate relief.

The traditional providers, like SW, prefund the tax relief themselves. The SIPP providers just wait for the money to arrive from HMRC. It can even be as long as 11 weeks I think, although normally a bit less.

Perhaps more importantly look at the charges, often workplace pensions are heavily discounted, which is not always immediately obvious from the website.

Sam_666

You are looking at all this from wrong way around.
Dont waste time focusing on PSA, stop chasing small change.

Read about your work pension. Is it DC or DB? Is it salary scrifice, if so maximize conributions from wages.
What is work pension invested in? It it "lifestile" rubish, if so look for option to switch to "global" or NA fund.
Stay away from anything with word "active".

After incresing work pension contributions, calculate how much anual allowance is left.
Do you have any unsed pension allowance from last 3 years? Now you will get to sum that you could potentialy use for sipp.

Point is, maximize work pension, then look at sipp. Dont look for immediate relief, focus on cost and funds available. Remeber, work pension is fully protected, but sipp only up to £85k.

phlebas192

Albermarle said:

The traditional providers, like SW, prefund the tax relief themselves. The SIPP providers just wait for the money to arrive from HMRC. It can even be as long as 11 weeks I think, although normally a bit less.

Or even longer! eg if you pay into AJ Bell on the 6th of a month then the tax relief won't arrive until the 25th of the next month but one. eg 6th April to 25th June which is 80 days later. 

Gambler

Sam_666 said:

You are looking at all this from wrong way around.
Dont waste time focusing on PSA, stop chasing small change.

Read about your work pension. Is it DC or DB? Is it salary scrifice, if so maximize conributions from wages.
What is work pension invested in? It it "lifestile" rubish, if so look for option to switch to "global" or NA fund.
Stay away from anything with word "active".

After incresing work pension contributions, calculate how much anual allowance is left.
Do you have any unsed pension allowance from last 3 years? Now you will get to sum that you could potentialy use for sipp.

Point is, maximize work pension, then look at sipp. Dont look for immediate relief, focus on cost and funds available. Remeber, work pension is fully protected, but sipp only up to £85k.

Thanks Sam I didn't realise SIPP's were only protected up to £85K.

It's a DC scheme but is not salary sacrifice so I am currently paying in the max of 7% matched by my employer. I have plenty of unused allowance from the last 3 years hence me looking to maximise higher rate relief this tax year.

The current fund is:

https://documents.feprecisionplus.com/factsheet/SWCPZ/FS/R73R_en-GB_Wrap_ABI_SWSingleBranded.pdf

Marcon

Sam_666 said:

Read about your work pension. Is it DC or DB? 

OP has already said it's a DC arrangement.

Sam_666 said:

After incresing work pension contributions, calculate how much anual allowance is left.
Do you have any unsed pension allowance from last 3 years? Now you will get to sum that you could potentialy use for sipp.

Limited by how much OP is earning in the tax year in which the lump sum contribution is made, unless salary sacrifice is an option, assuming they want to pay into their work scheme rather than a SIPP (unlikely the employer will allow salary sacrifice for any scheme other than their own).

Sam_666 said:

Point is, maximize work pension, then look at sipp. Dont look for immediate relief, focus on cost and funds available. Remeber, work pension is fully protected, but sipp only up to £85k.

Not necessarily: https://www.fscs.org.uk/check/pension-protection-checker/

Albermarle

Gambler said:

Sam_666 said:

You are looking at all this from wrong way around.
Dont waste time focusing on PSA, stop chasing small change.

Read about your work pension. Is it DC or DB? Is it salary scrifice, if so maximize conributions from wages.
What is work pension invested in? It it "lifestile" rubish, if so look for option to switch to "global" or NA fund.
Stay away from anything with word "active".

After incresing work pension contributions, calculate how much anual allowance is left.
Do you have any unsed pension allowance from last 3 years? Now you will get to sum that you could potentialy use for sipp.

Point is, maximize work pension, then look at sipp. Dont look for immediate relief, focus on cost and funds available. Remeber, work pension is fully protected, but sipp only up to £85k.

Thanks Sam I didn't realise SIPP's were only protected up to £85K.

It's a DC scheme but is not salary sacrifice so I am currently paying in the max of 7% matched by my employer. I have plenty of unused allowance from the last 3 years hence me looking to maximise higher rate relief this tax year.

The current fund is:

https://documents.feprecisionplus.com/factsheet/SWCPZ/FS/R73R_en-GB_Wrap_ABI_SWSingleBranded.pdf

The protection is really a non issue.
There is no protection against investment losses in a pension.
It is really only protection against losses from fraud or administration costs. These are vanishingly small if you stick to mainstream providers.

DRS1

Going back to @Gambler's original question there are some figures possibly missing such as taxable interest and dividends or rental income even.  True they don't count for pension contributions but they do impact on total taxable income and so how much you need to contribute to get the total down below the higher rate threshold.

You also need to check how your pension contributions to the DC scheme get their tax relief.  For example if you are paying £7000 net into a relief at source scheme you will find your actual contribution is treated as being £8750.  You will also find that the £8750 is added to your higher rate threshold rather than being deducted from your taxable income.  It sounds weird but it is so the higher rate tax relief works properly.

Bear in mind that if you contribute to a SIPP that will be a relief at source contribution so if you work out you need to pay a £12000 gross SIPP contribution then your actual contribution should be £9600 which will be grossed up to £12k

Is the £100k salary figure inclusive of your personal pension contributions or exclusive?

I assume the PHI figure is an add on to your income and the professional subs are a deduction?

Ignoring existing pension contributions and other income for the moment that means you have taxable income of £102k.  Your higher rate threshold is £50270 plus the £1k gift aid so £51270.  That leaves £50730 as the figure to contribute to get you down to the higher rate threshold.  Maybe you deduct £8750 from that to cover your existing pension contributions.

Just to say if you have a lot of extra taxable income then you could be knocking into the annual allowance of £60k (and for that you have to take into account employer contributions as well as yours).

Someone will be along soon to tell you if I got any of those sums wrong - especially the gift aid bit.

Gambler

DRS1 said:

Going back to @Gambler's original question there are some figures possibly missing such as taxable interest and dividends or rental income even.  True they don't count for pension contributions but they do impact on total taxable income and so how much you need to contribute to get the total down below the higher rate threshold.

You also need to check how your pension contributions to the DC scheme get their tax relief.  For example if you are paying £7000 net into a relief at source scheme you will find your actual contribution is treated as being £8750.  You will also find that the £8750 is added to your higher rate threshold rather than being deducted from your taxable income.  It sounds weird but it is so the higher rate tax relief works properly.

Bear in mind that if you contribute to a SIPP that will be a relief at source contribution so if you work out you need to pay a £12000 gross SIPP contribution then your actual contribution should be £9600 which will be grossed up to £12k

Is the £100k salary figure inclusive of your personal pension contributions or exclusive?

I assume the PHI figure is an add on to your income and the professional subs are a deduction?

Ignoring existing pension contributions and other income for the moment that means you have taxable income of £102k.  Your higher rate threshold is £50270 plus the £1k gift aid so £51270.  That leaves £50730 as the figure to contribute to get you down to the higher rate threshold.  Maybe you deduct £8750 from that to cover your existing pension contributions.

Just to say if you have a lot of extra taxable income then you could be knocking into the annual allowance of £60k (and for that you have to take into account employer contributions as well as yours).

Someone will be along soon to tell you if I got any of those sums wrong - especially the gift aid bit.

Thank you.

No other income and interest will be within PSA. £7000 contribution to my pension costs me £5600.