Annual Earnings Into SIPP And Tax Relief

Afternooner

My friend has her own business which earns circa £18k per year. She understands that she can contribute 100% of her earnings into a SIPP to provide a pension, obtain tax relief and also avoid paying income tax on her earnings about the threshold.

So 12 months ago, she opened a SIPP and funded it with her annual earnings.

She expected the SIPP provider to add 20% tax relief into the account but this has not happened.

Before she challenges the SIPP provider, she’s asked me ask the knowledgeable members of this forum whether her expectations were incorrect or has the SIPP provider made a mistake?

Any advice would be greatly appreciated.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/6653038/annual-earnings-into-sipp-and-tax-relief

Is she self employed?

And if so why did she think she could get basic rate relief added to her contribution AND avoid paying tax on some of her profits 🤔

molerat

How were the contributions made ? If hey were made as employer contributions then no relief would be added. Another point is that paying in to a SIPP would not reduce the amount of tax paid on that income, personal contributions are made from net taxed income and the basic rate tax is rebated into the pension. If her income was £18K she should only have put £14.4K into the SIPP which would have been grossed up to £18K

Marcon

https://forums.moneysavingexpert.com/discussion/6653038/annual-earnings-into-sipp-and-tax-relief

Depends on the structure of her business. If she is self employed, then she'd add 80% of her earnings and the SIPP provider would add tax relief at the basic rate.

If she works through her own limited company and the contributions were shown as 'employer contributions' then the SIPP provider correctly assumed they were made gross. Employer contributions always are gross - the company can normally claim them as a business expense and doesn't pay corporation tax on them.

Afternooner

Hello again and thank you for your replies.

She's self employed and doesn't have a limited company. Her business is very simple - she's an artist and people pay for drawings they've commissioned.

She raised the question because she's in a similar position this year, it's "self assessment tax return" time and is now wondering what's the best approach to take this time.

Thank you again.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81863492#Comment_81863492

Step 1 is understanding why the pension company haven't added basic rate tax relief (25% of her net contribution).

DRS1

She really needs to be sure what sort of pension contributions she is making. If they are personal contributions to a SIPP (which is what it sounds like) then you would expect the SIPP to reclaim the basic rate tax as mentioned above.

If that is what she has done then the figure gets included in box 1 (as the grossed up amount including the basic rate tax relief claimed) Box 1 is the one that says

"Payments to registered pension schemes where basic rate tax relief will be claimed by your pension provider (called ‘relief at source’). Enter the payments and basic rate tax"

But if she is sure the SIPP has not reclaimed the basic rate tax relief then she should put the amount contributed in box 2. She really needs to be certain about this though - sometimes it can take time for the tax relief to appear in the SIPP and so it may have reclaimed it but it may just not be showing yet. Box 2 is the one that says

"Payments to a retirement annuity contract where basic rate tax relief will not be claimed by your provider"

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81863526#Comment_81863526

That is just for a very specific type of pension which started in 1988 or earlier though.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81863535#Comment_81863535

Yes but even though a SIPP is not an RAC I believe that is still the box you have to use where the pension doesn't reclaim the basic rate tax relief. I believe I got that from a page on Gov.uk and will see if I can find it.

DRS1

Well predictably I can't find what I thought I remembered and the SA Notes just talk about RACs for box 2.

Hopefully the OP has found that relief at source has been given and the figure can safely go in box 1.

Marcon

https://forums.moneysavingexpert.com/discussion/comment/81863492#Comment_81863492

It's not a question of the 'best approach' - in her case there is only one approach. Her self assessment tax return needs to be filed today to avoid a fine, so it would be a good idea to deal with that and then clarify the position with the SIPP provider next week. It's an entry of £18,000 into Box 1, which is the amount she should have paid (£14,400) + basic rate tax on the gross contribution:

She then needs to contact her SIPP provider and let them know she has accidentally overpaid contributions during the tax year (no harm in explaining that she paid in the whole of her profits - she won't be the first and certainly not the last!) and request a refund of the overpayment of £3,600. It shouldn't be a big deal - see https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/refund-of-contributions/

She may also need to check that the SIPP provider knows these are personal contributions. If she's ticked the wrong box and they've been recorded as an employer contribution, that needs to be remedied to avoid real chaos.