SIPP Contributions

Hi
I have £90k cash left to me by a relative.
I earn £25K a year-so how what is the maximum tax relief I can get if I put into the cash into a SIPP.
I keep reading that I will only get tax relief up to the amount I earn so if I put the max £40 K on I will only get tax relief on £25K?

Comments

  • robber2
    robber2 Posts: 558
    First Post Name Dropper First Anniversary
    Forumite
    the trick is to spend your SIPP contributions across several tax years; about £20k now, another £20k next April and so on.



    Details of all exisitng personal or company pension contributions are needed to tell you exactly what the figures should be.
  • How does this work in principle as if I put in the max £40k in cash-the next month I would get the 20% tax relief added-how do they know I would not be earning £40K that year?
  • robber2
    robber2 Posts: 558
    First Post Name Dropper First Anniversary
    Forumite
    Dont know to be honest but you can be confident that HMRC would eventually hit you with a huge bill plus penalties.

    Someone more klnowledgable will no doubt be along shortly to confirm how they will catch you :-)


    regards


    Rob
  • Mnd
    Mnd Posts: 1,699
    First Anniversary Name Dropper First Post
    Forumite
    They will know at the end of the tax year and get it back
    No.79 save £12k in 2020. Total end May £11610
    Annual target £24000
  • AnotherJoe
    AnotherJoe Posts: 19,622
    First Anniversary Name Dropper First Post Photogenic
    Forumite
    How does this work in principle as if I put in the max £40k in cash-the next month I would get the 20% tax relief added-how do they know I would not be earning £40K that year?


    The max is the lower of £40k OR your earnings this tax year.


    So, dont go adding £40k or you'll end up in a big mess. As said, put the max in each year, the max in this case being your earnings, so around £20k assuming you are not putting anything in from your current employment. If you are, deduct that first.
  • kidmugsy
    kidmugsy Posts: 12,709
    First Anniversary Name Dropper First Post Combo Breaker
    Forumite
    Hi
    I have £90k cash left to me by a relative.
    I earn £25K a year-so how what is the maximum tax relief I can get if I put into the cash into a SIPP.
    I keep reading that I will only get tax relief up to the amount I earn so if I put the max £40 K on I will only get tax relief on £25K?

    You earn £25k. I'll assume you contribute 4% to your pension at work = £1k.

    So you can now make a "gross" contribution of £25k - £1k = 24k.

    To do that you hand the provider 80% of that amount, £19,200, called the "net" contribution. They claim the difference, £4,800 from the taxman and add it to your account which will now contain the "gross" contribution of £24k.

    Then you repeat for as many tax years as you fancy. But if you make a bigger gross contribution than that £24k you'll get no tax relief on the extra. So simply never do that.

    You can also salt away £4k each tax year to a LISA if you like, from age under 40 to age under 50. The taxman adds £1k each time. You can take the money out free of tax and free of penalties from age 60. You can take it out (without penalty) earlier to help buy a house if you are a "first time buyer". You can also take it out without penalty if you are terminally ill. Otherwise withdrawals before 60 are penalised enough to sting, but not ruinously. On top of that you could put £16k p.a. into an S&S ISA.

    One other point: is your pension at work funded by what is called "salary sacrifice" or "salary exchange" or "smart pension"? If so it would be a good idea to maximise the use of this first, before you make any freelance pension contributions. The reason is that "sal sac" avoids not only income tax but also National Insurance Contributions. In fact the advantage is so high that you might decide to use sal sac for all your pension contributions and hold the rest of the capital back somewhere until you need it, using some of it every year to live off because your take-home pay will have been reduced to allow more to go to the sal sac pension.

    There are other variations but to discuss them we'd probably want to know more about you, especially your age, marital status, children, and so on.

    Remember to make sure you have a good cash emergency fund before you start stashing money away for investments. A common piece of advice is to have 6 months worth of your necessary outgoings in cash. You bung it into a savings account, or an interest-paying current account, with the best combination for you of interest rate and convenience.
    Free the dunston one next time too.
This discussion has been closed.
Meet your Ambassadors

Categories

  • All Categories
  • 342.5K Banking & Borrowing
  • 249.9K Reduce Debt & Boost Income
  • 449.4K Spending & Discounts
  • 234.6K Work, Benefits & Business
  • 607.1K Mortgages, Homes & Bills
  • 172.8K Life & Family
  • 247.4K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 15.8K Discuss & Feedback
  • 15.1K Coronavirus Support Boards