Quick mad question on additional contributions!

Mr_Crabbs

All geared up to make an additional pension contribution tomorrow to get it in this tax year. Current earnings £43k PAYE + £21k income from defined benefit pension.

Plan is to contribute enough to reduce income to the basic rate tax band and reclaim the higher rate tax paid, i.e. pay in c. £14k to get down to £50k and reclaim c. £6k of higher rate tax, but I'm going slightly mad.

Does this work? I'm seeing stories about people having difficulty reclaiming; despite all the discussions I've had about this I'm worried somehow it's not allowed, maybe because pension income isn't relevant UK earnings - or is that just when calculating annual allowance?

Confirmation from someone who's done it, or a definitive link, would be great. Thanks.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/6658858/quick-mad-question-on-additional-contributions

I think you have got your maths all wrong.

A SIPP contribution will normally be made using the "relief at source" method i.e. £11,200 paid by you becomes £14,000 in the pension with the basic rate relief added (20% of the gross contribution).

That doesn't reduce your taxable income at all. But it does increase your basic rate band by £14,000 to £51,700.

Can you explain how you think this will generate a £6k tax refund?

Telling HMRC is very simple these days, there is a form on gov.uk specifically for this situation where you need to claim additional tax relief on relief at source contributions.

https://www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments

NoMore

The Pension income will not count against the limit for how much you can contribute to the SIPP, but it will count towards the amount of tax relief due.

So you can't contribute more than 43k gross to the SIPP and get tax relief, despite your total income being 64k, however when it comes to working out the tax relief, your income of 64k will count.

Edit : I didn't check your maths, like dazed has, so take note of their post as well.

Albermarle

Pension income does not count as relevant earnings, but you earn enough employment income to make the contributions you suggest.

Dazed_and_C0nfused

I guess this might be the rare occasion when it isn't a contribution to a SIPP/personal pension though. Hopefully the op will clarify exactly what it is they are planning on doing.

Mr_Crabbs

https://forums.moneysavingexpert.com/discussion/comment/81916194#Comment_81916194

We're in a position now to pay into a SIPP or make an additional lump sum contribution to an existing DB scheme (not the one the current pension income is from). DB seems to be the chosen option.

As I understand it if we pay into a SIPP, we pay 80%, provider adds the basic rate relief (relief at source), and we have to claim the higher rate relief (another 20%).

If we pay into the DB scheme I'd understood we have to put the full amount in and reclaim all the relief direct from HMRC, hence the £6k (40%) refund; or am I mistaken?

Figures don't quite tie up as I've rounded.

Mr_Crabbs

https://forums.moneysavingexpert.com/discussion/comment/81916203#Comment_81916203

Thankyou. I think I'd confused relevant earnings for annual contribution allowance, and taxable income for relief. As long as we can recover the tax on the highest marginal rate / income over the higher rate threshold we're good. Note taken.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81916301#Comment_81916301

There isn't "another 20%". The additional relief will depend on the overall tax position.

Using your figures as an example there would only higher rate tax paid on £13,730 so that would immediately limit the higher rate relief due. Although there couple be other consequential benefits like eligibility for Marriage Allowance which make the overall tax saving better.

With a gross contribution to a DB you are correct that there will be no tax relief added at source but again higher rate tax isn't being on £14,000 so that will impact the relief due. This type of contribution does have a similar effect as having extra Personal Allowance i.e. an extra £14,000 wouldn't be taxed.

It is the same form on gov.uk irrespective of the type of contribution. But you can expect a longer wait for the correct refund with the payment to a DB scheme. Despite being the type of contribution HMRC staff themselves could make they really struggle to understand those.

DRS1

Plan is to contribute enough to reduce income to the basic rate tax band and reclaim the higher rate tax paid, i.e. pay in c. £14k to get down to £50k and reclaim c. £6k of higher rate tax, but I'm going slightly mad.

Not quite how it works. If you do a SIPP contribution so your higher rate threshold gets extended (as explained above) then you will still find you are paying 20% tax on the income under that extended threshold. So at most you might "reclaim" £2800. The basic rate relief is given by adding it to your SIPP (so you pay in £11200 net for a gross contribution of £14k).

BTW you haven't taken a tax free lump sum from your DB pension in the last two years have you?

Mr_Crabbs

https://forums.moneysavingexpert.com/discussion/comment/81916206#Comment_81916206

Thanks. My confusion.

Mr_Crabbs

https://forums.moneysavingexpert.com/discussion/comment/81916312#Comment_81916312

Thanks. Exact figures are total income £65,162 made up of PAYE £43,768, pension income £21,591 and savings interest £4003. I make that £65,162 - £50,270 = £14,982 income at higher rate x 40% = £5957 higher rate tax paid (via tax code). I'm obviously misunderstanding the maths here somehow but not sure where?