SIPP Tax relief - basic tax payer vs. higher rate

Sir2You · 13 December 2018 at 6:21PM

Good Evening
I would welcome some help to validate my understanding of total pension contribution and tax relief. I’m a basic tax payer in 2018/2019 but will go back full time in 2019/2020 so will be a higher tax payer. My situation:
- A work pension contribution as part of a Defined Contribution scheme (employee = x, employer =2*x)
- A SIPP with personal contribution + related 20% HMRC Tax relief (individual = y, HMRC =0.25*y). I started it this year.

1) Am I correct to assume that my total pension contribution based on the above for a given tax year is therefore T = 3*x+1.25*y (i.e. the HMRC tax relief added to my SIPP is included)?

2) I understand that for higher tax payers additional tax relief up to 40% can be claimed back from HMRC.
I understand that this would not be added to the SIPP but recovered through tax relief through a Self-Assessment.
Would the extra additional tax relief apply to the total amount of my contribution to the SIPP (ie. y) or would this be proportioned to part of my income (ie what is above the basic rate)?

I’m asking the question as I now have the opportunity to invest £10k in my SIPP, however I think that I would be better off waiting for April 7th with the view to benefiting from the higher tax relief (I will have some AA Carry forward in excess of £40k). Is my understanding correct?

Thanks in advance for your help

Linton · 13 December 2018 at 7:22PM

Sir2You wrote: »

Good Evening
I would welcome some help to validate my understanding of total pension contribution and tax relief. I’m a basic tax payer in 2018/2019 but will go back full time in 2019/2020 so will be a higher tax payer. My situation:
- A work pension contribution as part of a Defined Contribution scheme (employee = x, employer =2*x)
- A SIPP with personal contribution + related 20% HMRC Tax relief (individual = y, HMRC =0.25*y). I started it this year.

1) Am I correct to assume that my total pension contribution based on the above for a given tax year is therefore T = 3*x+1.25*y (i.e. the HMRC tax relief added to my SIPP is included)?

The tiotal going into your pension is 3x+1.25y. 2x of that is an employers contribution that has no effect on your tax and doesnt count against the earnings limit. It does count against the £40K limit though.

2) I understand that for higher tax payers additional tax relief up to 40% can be claimed back from HMRC.
I understand that this would not be added to the SIPP but recovered through tax relief through a Self-Assessment.
Would the extra additional tax relief apply to the total amount of my contribution to the SIPP (ie. y) or would this be proportioned to part of my income (ie what is above the basic rate)?

You only get higher rate tax relief on the higher rate tax you paid.

I’m asking the question as I now have the opportunity to invest £10k in my SIPP, however I think that I would be better off waiting for April 7th with the view to benefiting from the higher tax relief (I will have some AA Carry forward in excess of £40k). Is my understanding correct?

Yes though unless you were paying higher rate tax on at least £12500 next year you could always put some in this year.

Sir2You · 4 January 2019 at 11:42PM

Thanks Linton.

I didn't quite think about it this way so this is a bit of a lightbulb moment for me: In practical terms, would this mean that to max out on the tax relief for these extra £10k I would need to have earned at least £56,350 i.e. the £46,350 to get into the higher 40% rate bracket plus the £10k?

Sir2You · 4 January 2019 at 11:58PM

Sorry, got my numbers muddled up, I meant at least £47,500 ie. the £37,500 to get to the higher tax rate (not £46,350 :-() plus the £10k...

Dazed_and_confused · 5 January 2019 at 12:03AM

2) I understand that for higher tax payers additional tax relief up to 40% can be claimed back from HMRC.
I understand that this would not be added to the SIPP but recovered through tax relief through a Self-Assessment.

It can be upto 41% for higher rate payers, it depends where you are resident for tax purposes.

Any additional relief over and above the basic rate relief benefits you, it isn't added to the SIPP. If you are completing Self Assessment returns then it is taken into account in your Self Assessment calculation but you don't generally have to file a Self Assessment return just to claim higher rate relief on your pension contributions.

Dazed_and_confused · 5 January 2019 at 12:07AM

I’m asking the question as I now have the opportunity to invest £10k in my SIPP,

Sorry, got my numbers muddled up, I meant at least £47,500 ie. the £37,500 to get to the higher tax rate (not £46,350 :-() plus the £10k...

If you invest £10k then that is a gross contribution of £12,500.

So assuming you aren't Scottish resident for tax purposes and don't have adjusted net income in excess of £100,000 then you would have the following in 2019:20
Personal Allowance £12,500
Plus
Basic rate band £50,000

cloud_dog · 5 January 2019 at 12:17AM

Sir2You wrote: »

Thanks Linton.

I didn't quite think about it this way so this is a bit of a lightbulb moment for me: In practical terms, would this mean that to max out on the tax relief for these extra £10k I would need to have earned at least £56,350 i.e. the £46,350 to get into the higher 40% rate bracket plus the £10k?

Does your employer operate Salary Sacrifice?

This can have additional advantages for the employee in regard to additional NI savings (2% for higher rate and 12% for basic rate).

If they do you may want to reassess your own SIPP contributions.

SIPP Tax relief - basic tax payer vs. higher rate

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