Help with difficult SIPP question which is confusing ChatGPT

zagfles

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.

Why would £20 be payable on the interest, surely a £1600 gross cont would mean OP's total income inc interest is in the basic rate band and so all the £600 interest would be tax free, as the PSA would be £1000. 

But it's a good point, the effective tax relief for that extra £600 gross pension contribution is 26.6%, is that worth it? Particularly with fiscal drag, if it carries on then lots of people with modest pensions will run the risk of paying 40% on their pension income.