Calculating SIPP Contribution

AlanP_2

Just trying to work out how much my other half would need to pay into a SIPP to get her out of the 40% tax bracket this tax year.

Two sources of income with 25/26 tax codes and taxable pay for each as below:

Taxable Salary of £19,920 taxed at BR

Pension Income of £34,040 taxed at 342L

Total income = £53,960 plus some savings interest taking it to about £55k.

How do I calculate the gross amount she needs to contribute to avoid any 40% tax?

Note - no issues with AA or MPAA as pension is DB.

Thanks

Isthisforreal99

https://forums.moneysavingexpert.com/discussion/6661331/calculating-sipp-contribution

You need to more accurate than 'some savings interest' but assuming £55k taxable income and not in Scotland then anything over £50,270 will be liable at HR so 80% of that excess into a SIPP would eliminate any higher rate tax.

AlanP_2

https://forums.moneysavingexpert.com/discussion/comment/81937583#Comment_81937583

I thought the £50,270 was based on a "normal" tax code i.e. £12,570 at 0%, £37,700 at 20% and anything else at 40%+. Doesn't the individual's tax code have an impact?

Assuming it does I thought our situation would be £3,420 at 0%, £37,700 at 20%, and anything else at 40%+.

This would mean paying 40% on anything over £41,120 and thus requiring a gross SIPP contribution of £13,880 to totally avoid any higher rate tax.

This is what I wanted to check, hence asking "how" to work it out as opposed to asking "how much".

Isthisforreal99

https://forums.moneysavingexpert.com/discussion/comment/81937958#Comment_81937958

Why is the code 342L - state pension or something else. Whatever it is add it on to the total income then work on the basis of what I said of anything over £50,270.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81937958#Comment_81937958

Tax codes are merely a provisional attempt to collect some tax, they are not a major factor in determining your actual tax liability once a tax year has ended.

AlanP_2

https://forums.moneysavingexpert.com/discussion/comment/81938009#Comment_81938009

No SP or other source of income.

AFAIK it is HMRCs way of trying to fit 2 separate PAYE payments into a total amount that takes, approximately, the correct amount of tax over a year.

Neither source of income would attract HR tax on their own but combined they do so her tax code is reduced to push more income out of the 0% band into the 20% band. This effectively covers the additional 20% due on the income exposed to the HR level. State Pension income would see the same outcome as I understand it.

So looks like a gross payment of £4,750 should get us to where we want to be.

Thanks

AlanP_2

An additional query - what would be the effective tax rate on withdrawals from her SIPP be in the future if it was taxed at 40% with a 25% TFLS?

For a BR taxpayer it works out at 15% which means BR relief on way in and BR tax on way out creates a 6.25% advantage.

Trying to calculate the same for HR relief on way in and HR tax on way out.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81938092#Comment_81938092

Er .. 30%.

Albermarle

As above , she will still have a 10% tax advantage.

If you are a 20% taxpayer in employment, and 40% in retirement,( which would be unusual) then it would be minus 10% .

If you are a 40% taxpayer in employment, and 20% in retirement ( or pay no tax ) then you are quids in !

AlanP_2

https://forums.moneysavingexpert.com/discussion/comment/81938120#Comment_81938120

That was obvious once I read the answer 🤣 Thanks