Stakeholder, SIPPs & tax relief

saxmund

I have just received a substantial redundancy payment. So far I have only been taxed at 20% but I will have a substantial tax liability for higher rate tax.

I am considering investing some of it in a Stakeholder or SIPP in order to make the most of the tax relief and hopefully reduce my tax liability for this year.

Can anyone advise me how this works? If I put, say, £20,000 (net) in a pension plan, how much tax relief would I get on top? As I understand it, the basic rate tax relief would go into the pension plan, and the remaining 20% higher rate would effectively be offset against my tax bill for 2008/9 - is this correct?

As I've always been in a final salary scheme, I'm a bit new to the world of money purchase pensions? Can anyone give me any pointers on what I should be looking for? I'm 43 and have a preserved final salary pension worth £10,700 a year (index linked).

Cheers,

Phil

david78

saxmund wrote: »

Can anyone advise me how this works? If I put, say, £20,000 (net) in a pension plan, how much tax relief would I get on top? As I understand it, the basic rate tax relief would go into the pension plan, and the remaining 20% higher rate would effectively be offset against my tax bill for 2008/9 - is this correct?

Yes. You would pay £25,000 gross. £20,000 is taken net and you get tax relief added to the plan of £5,000. Then you claim a further £5,000 against this years tax bill. You claim this on your tax return for 2008/2009. You need to ensure that you have earned enough this year though -- you must have earned £25,000 gross. Also you only get 40% relief on the portion of your salary (plus interest and dividends) that extends beyond the basic rate band. Hope this makes sense. On the rest you just get 20% relief.

saxmund wrote: »

Can anyone give me any pointers on what I should be looking for? I'm 43 and have a preserved final salary pension worth £10,700 a year (index linked).

Low charges, good performance on the funds, and good administration.