Help with difficult SIPP question which is confusing ChatGPT

Shickly

Hello there,

I came here a few months back and received some very sound advice from some very clued up people, I was hoping for the same again, as I am going to find myself in a very similar position to the below scenario come March this year.


Lets say you're approaching the end of the tax year and receive your final paycheque. Your taxable employment income is £51270 and you have earned £600 in interest from savings.

You would like to open a SIPP in order to avoid the tax implications of the above.

As it stands, you of course are going to pay 40% tax on £1000 of your employment income and £100 on your savings interest.

I have asked ChatGPT what someone in this position would need to contribute to a SIPP in order to minimise tax paid.

The answer i've been given is that you would need a gross SIPP contribution of £1600, (net of £1280), due to your "Adjusted net income" being £51870. Therefore with a gross SIPP contribution of £1600, you would reduce this to £50270 and bring your adjusted net income back below the higher rate tax bracket.

I have then questioned the answer, asking it if a gross SIPP contribution of £1000 (net of £800) would be enough. On the basis that a gross SIPP contribution of £1000 would bring the taxable employment income to £50270, therefore bringing the personal savings allowance back up from £500 to the £1000 that it is for standard rate tax payers, leaving the £600 savings interest untaxed.

ChatGPT has then agreed with this, stating that a gross SIPP contribution of £1000 would actually be enough, despite the resulting adjusted net income being £50270 + £600.

Does anyone know which case is correct, as I would like to do this later this year, and would like to avoid an unnecessarily high contribution to the SIPP in doing so.

Any help would be appreciated.

Before any advice along the lines of putting money in an ISA, or increasing employee pension contributions. Lets assume that the yearly ISA allowance has been maxed out, and there is no prospect of increasing employee pension contributions.

Grumpy_chap

The way I understand the rules for Savings Allowance is that the taxable income band is calculated first:

Personal Savings Allowance

You may also get up to £1,000 of interest and not have to pay tax on it, depending on which Income Tax band you’re in. This is your Personal Savings Allowance.

To work out your tax band, add all the interest you’ve received to your other income.

Income Tax band	Personal Savings Allowance
Basic rate	£1,000
Higher rate	£500
Additional rate	£0

Taken from here ( https://www.gov.uk/apply-tax-free-interest-on-savings )


As I read that, you would take the employment income £51,270 and add the interest £600 to make a total of £51,870 which determines you as a higher rate band income tax payer.  

You need your ANI to be below £50,270 to be a basic rate tax payer so that requires a £1,600 gross pension contribution.  That means a net pension contribution of £1,280.

Assume you are resident in England, Wales, Northern Ireland.

Assume you have no other allowances that already reduce your ANI.

Dazed_and_C0nfused

Shickly said:

Hello there,

I came here a few months back and received some very sound advice from some very clued up people, I was hoping for the same again, as I am going to find myself in a very similar position to the below scenario come March this year.


Lets say you're approaching the end of the tax year and receive your final paycheque. Your taxable employment income is £51270 and you have earned £600 in interest from savings.

You would like to open a SIPP in order to avoid the tax implications of the above.

As it stands, you of course are going to pay 40% tax on £1000 of your employment income and £100 on your savings interest.

I have asked ChatGPT what someone in this position would need to contribute to a SIPP in order to minimise tax paid.

The answer i've been given is that you would need a gross SIPP contribution of £1600, (net of £1280), due to your "Adjusted net income" being £51870. Therefore with a gross SIPP contribution of £1600, you would reduce this to £50270 and bring your adjusted net income back below the higher rate tax bracket.

I have then questioned the answer, asking it if a gross SIPP contribution of £1000 (net of £800) would be enough. On the basis that a gross SIPP contribution of £1000 would bring the taxable employment income to £50270, therefore bringing the personal savings allowance back up from £500 to the £1000 that it is for standard rate tax payers, leaving the £600 savings interest untaxed.

ChatGPT has then agreed with this, stating that a gross SIPP contribution of £1000 would actually be enough, despite the resulting adjusted net income being £50270 + £600.

Does anyone know which case is correct, as I would like to do this later this year, and would like to avoid an unnecessarily high contribution to the SIPP in doing so.

Any help would be appreciated.

Before any advice along the lines of putting money in an ISA, or increasing employee pension contributions. Lets assume that the yearly ISA allowance has been maxed out, and there is no prospect of increasing employee pension contributions.

Are you happy contributing more to a pension to totally avoid paying higher rate tax or is there a point where you would accept paying some higher rate tax if it meant the pension contribution needed was significantly less?

For example pay £1,280 (net) and pay £20 tax on the interest.  Or pay just £800 (net) and pay an extra £20 tax?

Clearly if there is a cliff edge impact such as losing Marriage Allowance the larger contribution would be better financially but they isn't something you have mentioned.

Also, whatever you do contributions to a SIPP are nerve going to change your taxable employment income.  They can only change the rate the income is taxed at.

Vitor

The AI mistakenly used “adjusted net income” as if it decides whether you are a higher-rate taxpayer. Adjusted net income is a separate calculation used for things like the personal allowance taper and the High Income Child Benefit Charge, not for setting the income tax bands or the savings allowance test. 

Albermarle

Dazed_and_C0nfused said:

Shickly said:

Hello there,

I came here a few months back and received some very sound advice from some very clued up people, I was hoping for the same again, as I am going to find myself in a very similar position to the below scenario come March this year.


Lets say you're approaching the end of the tax year and receive your final paycheque. Your taxable employment income is £51270 and you have earned £600 in interest from savings.

You would like to open a SIPP in order to avoid the tax implications of the above.

As it stands, you of course are going to pay 40% tax on £1000 of your employment income and £100 on your savings interest.

I have asked ChatGPT what someone in this position would need to contribute to a SIPP in order to minimise tax paid.

The answer i've been given is that you would need a gross SIPP contribution of £1600, (net of £1280), due to your "Adjusted net income" being £51870. Therefore with a gross SIPP contribution of £1600, you would reduce this to £50270 and bring your adjusted net income back below the higher rate tax bracket.

I have then questioned the answer, asking it if a gross SIPP contribution of £1000 (net of £800) would be enough. On the basis that a gross SIPP contribution of £1000 would bring the taxable employment income to £50270, therefore bringing the personal savings allowance back up from £500 to the £1000 that it is for standard rate tax payers, leaving the £600 savings interest untaxed.

ChatGPT has then agreed with this, stating that a gross SIPP contribution of £1000 would actually be enough, despite the resulting adjusted net income being £50270 + £600.

Does anyone know which case is correct, as I would like to do this later this year, and would like to avoid an unnecessarily high contribution to the SIPP in doing so.

Any help would be appreciated.

Before any advice along the lines of putting money in an ISA, or increasing employee pension contributions. Lets assume that the yearly ISA allowance has been maxed out, and there is no prospect of increasing employee pension contributions.

Are you happy contributing more to a pension to totally avoid paying higher rate tax or is there a point where you would accept paying some higher rate tax if it meant the pension contribution needed was significantly less?

For example pay £1,280 (net) and pay £20 tax on the interest.  Or pay just £800 (net) and pay an extra £20 tax?

Clearly if there is a cliff edge impact such as losing Marriage Allowance the larger contribution would be better financially but they isn't something you have mentioned.

Also, whatever you do contributions to a SIPP are nerve going to change your taxable employment income.  They can only change the rate the income is taxed at.

And to do that presumably the OP would have to inform HMRC of the gross pension contribution they have made ?

Cobbler_tone

Grumpy_chap said:

The way I understand the rules for Savings Allowance is that the taxable income band is calculated first:

Personal Savings Allowance

You may also get up to £1,000 of interest and not have to pay tax on it, depending on which Income Tax band you’re in. This is your Personal Savings Allowance.

To work out your tax band, add all the interest you’ve received to your other income.

Income Tax band	Personal Savings Allowance
Basic rate	£1,000
Higher rate	£500
Additional rate	£0

Taken from here ( https://www.gov.uk/apply-tax-free-interest-on-savings )


As I read that, you would take the employment income £51,270 and add the interest £600 to make a total of £51,870 which determines you as a higher rate band income tax payer.  

You need your ANI to be below £50,270 to be a basic rate tax payer so that requires a £1,600 gross pension contribution.  That means a net pension contribution of £1,280.

Assume you are resident in England, Wales, Northern Ireland.

Assume you have no other allowances that already reduce your ANI.

That's correct and I have first hand experience of it. My bonus (paid 1st April) took me £100 over the 40% band and I copped a higher tax bill on savings interest. I'd tracked it all year and my bonus is unknown until a week before it is paid and can be anything from £500-£10k. I'd ramped my contributions up too and not allowed to sacrifice the lot into the pension.
It is a learning opportunity and I'm fortunately in a position now to afford to stay well clear of that particular issue.
My foreseeable years will be between £35-50k taxable income. By the time it becomes a factor you would 'hope' the bands are pushed out a bit.

Shickly

Dazed_and_C0nfused said:

Shickly said:

Are you happy contributing more to a pension to totally avoid paying higher rate tax or is there a point where you would accept paying some higher rate tax if it meant the pension contribution needed was significantly less?

For example pay £1,280 (net) and pay £20 tax on the interest.  Or pay just £800 (net) and pay an extra £20 tax?

Clearly if there is a cliff edge impact such as losing Marriage Allowance the larger contribution would be better financially but they isn't something you have mentioned.

Also, whatever you do contributions to a SIPP are nerve going to change your taxable employment income.  They can only change the rate the income is taxed at.

I'd say the latter, there is a point where I'd accept paying some higher rate tax if it meant that the pension contribution needed was significantly less. Essentially I want to feel as though I am getting the best value both future and present.

Are you implying that in the example above with the smaller SIPP contribution, my employment income would go back to being taxed at 20%, but my savings interest would remain being taxed at 40%? Or something else, as I am missing the point you're making.

No, there is no cliff edge impact of the like. I am unmarried and childless for now. It is simply to feel as though I am not being rinsed of the excess income I am making for the first time that I have not made in previous years.

Yes, my mistake, I recall reading that the SIPP contribution essentially increases the threshold rather than reducing taxable income.

Could you elaborate on your above point? As it has got me intrigued.

Dazed_and_C0nfused

Shickly said:

Dazed_and_C0nfused said:

Shickly said:

Are you happy contributing more to a pension to totally avoid paying higher rate tax or is there a point where you would accept paying some higher rate tax if it meant the pension contribution needed was significantly less?

For example pay £1,280 (net) and pay £20 tax on the interest.  Or pay just £800 (net) and pay an extra £20 tax?

Clearly if there is a cliff edge impact such as losing Marriage Allowance the larger contribution would be better financially but they isn't something you have mentioned.

Also, whatever you do contributions to a SIPP are nerve going to change your taxable employment income.  They can only change the rate the income is taxed at.

I'd say the latter, there is a point where I'd accept paying some higher rate tax if it meant that the pension contribution needed was significantly less. Essentially I want to feel as though I am getting the best value both future and present.

Are you implying that in the example above with the smaller SIPP contribution, my employment income would go back to being taxed at 20%, but my savings interest would remain being taxed at 40%? Or something else, as I am missing the point you're making.

No, there is no cliff edge impact of the like. I am unmarried and childless for now. It is simply to feel as though I am not being rinsed of the excess income I am making for the first time that I have not made in previous years.

Yes, my mistake, I recall reading that the SIPP contribution essentially increases the threshold rather than reducing taxable income.

Could you elaborate on your above point? As it has got me intrigued.

If you remain a higher rate payer the first £500 of any interest would be taxed at 0%.

Leaving just £100 to be taxed, at either 20% or 40%.

Shickly

Dazed_and_C0nfused said:

Shickly said:

Dazed_and_C0nfused said:

Shickly said:

Are you happy contributing more to a pension to totally avoid paying higher rate tax or is there a point where you would accept paying some higher rate tax if it meant the pension contribution needed was significantly less?

For example pay £1,280 (net) and pay £20 tax on the interest.  Or pay just £800 (net) and pay an extra £20 tax?

Clearly if there is a cliff edge impact such as losing Marriage Allowance the larger contribution would be better financially but they isn't something you have mentioned.

Also, whatever you do contributions to a SIPP are nerve going to change your taxable employment income.  They can only change the rate the income is taxed at.

I'd say the latter, there is a point where I'd accept paying some higher rate tax if it meant that the pension contribution needed was significantly less. Essentially I want to feel as though I am getting the best value both future and present.

Are you implying that in the example above with the smaller SIPP contribution, my employment income would go back to being taxed at 20%, but my savings interest would remain being taxed at 40%? Or something else, as I am missing the point you're making.

No, there is no cliff edge impact of the like. I am unmarried and childless for now. It is simply to feel as though I am not being rinsed of the excess income I am making for the first time that I have not made in previous years.

Yes, my mistake, I recall reading that the SIPP contribution essentially increases the threshold rather than reducing taxable income.

Could you elaborate on your above point? As it has got me intrigued.

If you remain a higher rate payer the first £500 of any interest would be taxed at 0%.

Leaving just £100 to be taxed, at either 20% or 40%.

Sorry, this has baffled me. In what scenario could the £100 be taxed at 20%?

Would the mere fact that you have remained a higher rate payer not mean that the £100 is taxed at 40%, plus the remaining employment income over the threshold also being taxed at 40%?

In which case it would make no sense to remain a higher rate payer, unless you desperately needed the heavily taxed money in the short term? Just a small further contribution allowing you to have the £100 untaxed, and your employment income also minimally taxed. Albeit less in your pocket now, not much, and a relatively far greater amount in your retirement pot?

I feel I am missing something

DRS1

Shickly said:

Dazed_and_C0nfused said:

Shickly said:

Dazed_and_C0nfused said:

Shickly said:

Are you happy contributing more to a pension to totally avoid paying higher rate tax or is there a point where you would accept paying some higher rate tax if it meant the pension contribution needed was significantly less?

For example pay £1,280 (net) and pay £20 tax on the interest.  Or pay just £800 (net) and pay an extra £20 tax?

Clearly if there is a cliff edge impact such as losing Marriage Allowance the larger contribution would be better financially but they isn't something you have mentioned.

Also, whatever you do contributions to a SIPP are nerve going to change your taxable employment income.  They can only change the rate the income is taxed at.

I'd say the latter, there is a point where I'd accept paying some higher rate tax if it meant that the pension contribution needed was significantly less. Essentially I want to feel as though I am getting the best value both future and present.

Are you implying that in the example above with the smaller SIPP contribution, my employment income would go back to being taxed at 20%, but my savings interest would remain being taxed at 40%? Or something else, as I am missing the point you're making.

No, there is no cliff edge impact of the like. I am unmarried and childless for now. It is simply to feel as though I am not being rinsed of the excess income I am making for the first time that I have not made in previous years.

Yes, my mistake, I recall reading that the SIPP contribution essentially increases the threshold rather than reducing taxable income.

Could you elaborate on your above point? As it has got me intrigued.

If you remain a higher rate payer the first £500 of any interest would be taxed at 0%.

Leaving just £100 to be taxed, at either 20% or 40%.

Sorry, this has baffled me. In what scenario could the £100 be taxed at 20%?

Would the mere fact that you have remained a higher rate payer not mean that the £100 is taxed at 40%, plus the remaining employment income over the threshold also being taxed at 40%?

In which case it would make no sense to remain a higher rate payer, unless you desperately needed the heavily taxed money in the short term? Just a small further contribution allowing you to have the £100 untaxed, and your employment income also minimally taxed. Albeit less in your pocket now, not much, and a relatively far greater amount in your retirement pot?

I feel I am missing something

I think it is not just ChatGPT that you managed to confuse.

You are right that if you get it so you are a basic rate taxpayer then your PSA is £1k not £500 so the £100 would not be taxed at 20% but at 0%.

Shickly

DRS1 said:

Shickly said:

Dazed_and_C0nfused said:

Shickly said:

Dazed_and_C0nfused said:

Shickly said:

Are you happy contributing more to a pension to totally avoid paying higher rate tax or is there a point where you would accept paying some higher rate tax if it meant the pension contribution needed was significantly less?

For example pay £1,280 (net) and pay £20 tax on the interest.  Or pay just £800 (net) and pay an extra £20 tax?

Clearly if there is a cliff edge impact such as losing Marriage Allowance the larger contribution would be better financially but they isn't something you have mentioned.

Also, whatever you do contributions to a SIPP are nerve going to change your taxable employment income.  They can only change the rate the income is taxed at.

I'd say the latter, there is a point where I'd accept paying some higher rate tax if it meant that the pension contribution needed was significantly less. Essentially I want to feel as though I am getting the best value both future and present.

Are you implying that in the example above with the smaller SIPP contribution, my employment income would go back to being taxed at 20%, but my savings interest would remain being taxed at 40%? Or something else, as I am missing the point you're making.

No, there is no cliff edge impact of the like. I am unmarried and childless for now. It is simply to feel as though I am not being rinsed of the excess income I am making for the first time that I have not made in previous years.

Yes, my mistake, I recall reading that the SIPP contribution essentially increases the threshold rather than reducing taxable income.

Could you elaborate on your above point? As it has got me intrigued.

If you remain a higher rate payer the first £500 of any interest would be taxed at 0%.

Leaving just £100 to be taxed, at either 20% or 40%.

Sorry, this has baffled me. In what scenario could the £100 be taxed at 20%?

Would the mere fact that you have remained a higher rate payer not mean that the £100 is taxed at 40%, plus the remaining employment income over the threshold also being taxed at 40%?

In which case it would make no sense to remain a higher rate payer, unless you desperately needed the heavily taxed money in the short term? Just a small further contribution allowing you to have the £100 untaxed, and your employment income also minimally taxed. Albeit less in your pocket now, not much, and a relatively far greater amount in your retirement pot?

I feel I am missing something

I think it is not just ChatGPT that you managed to confuse.

You are right that if you get it so you are a basic rate taxpayer then your PSA is £1k not £500 so the £100 would not be taxed at 20% but at 0%.

Thank you, I follow. I think I know what to do come March. I could not find any threads on any forums asking this question, so hopefully this clears things up for anyone else looking for the same answer in the future. I will report back a few months from now as to whether I successfully managed this.