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  • FIRST POST
    • Gandhi
    • By Gandhi 9th Apr 18, 10:16 AM
    • 2Posts
    • 0Thanks
    Gandhi
    Pension relief and adjusted income
    • #1
    • 9th Apr 18, 10:16 AM
    Pension relief and adjusted income 9th Apr 18 at 10:16 AM
    Hi all,

    First post, but frequent lurker.

    I have question or two about tax relief on pension contributions and adjusted net income. I don't work in the UK at the moment, but I'm considering returning. Forgive my lack of knowledge, as retirement savings where I am take a very different form.

    I'm confused as to tax relief (particularly higher rate) on SIPP contributions, and how they pertain to adjusted net income.

    My income will be purely taxed via self assessment, to to overseas employer.

    If I make 100,000 gross salary ( no other) incomes or contributions) and contribute 32,000 into a SIPP, does my adjusted income now become 68,000?

    I understand that HMRC will add 8,000 basic relief into my SIPP pot to reach the 40,000 annual max. I also understand that I can claim higher rate relief. Is this in addition to reducing my taxable income?

    What form does that higher relief take? Is it a cheque from HMRC, or some form of credit?

    I'm unsure as to whether there is a double-whammy of benefits - reducing my adjusted taxable income to 68,000 AND gaining tax relief, or whether it is one or the other.

    When I run the numbers through the MSE tax calc, it suggests to me that if I make 32k a year SIPP contributions, I'm reducing my taxable income by said amount. At the bottom, under my pension contribution amount, there is a "pensions HMRC" figure, which is just over 20k. This looks like pension tax relief figures.

    Can someone kindly explain to me what the end result would be if, on 100k, I put 32k into a SIPP and claimed higher rate relief;

    What would my adjusted taxable income?

    What would be in my SIPP pot.

    What would my higher rate relief be, and in what form (cheque, further income reduction etc)?

    Because at this point, using the MSE calculator - unless I'm misreading the results - it reads as if I'm reducing my salary by 32k and then getting more back through relief than I'm paying in overall income tax.

    If anyone could clarify what my position would be, I'd be very grateful.

    Gandhi
Page 1
    • kidmugsy
    • By kidmugsy 9th Apr 18, 10:36 AM
    • 11,580 Posts
    • 8,103 Thanks
    kidmugsy
    • #2
    • 9th Apr 18, 10:36 AM
    • #2
    • 9th Apr 18, 10:36 AM
    I'd start here.
    https://3652daysblog.wordpress.com/2018/03/05/pension-allowance-taper/
    Free the dunston one next time too.
    • Dox
    • By Dox 9th Apr 18, 1:58 PM
    • 936 Posts
    • 718 Thanks
    Dox
    • #3
    • 9th Apr 18, 1:58 PM
    • #3
    • 9th Apr 18, 1:58 PM
    My income will be purely taxed via self assessment, to to overseas employer.

    If I make 100,000 gross salary ( no other) incomes or contributions) and contribute 32,000 into a SIPP, does my adjusted income now become 68,000?

    I understand that HMRC will add 8,000 basic relief into my SIPP pot to reach the 40,000 annual max. I also understand that I can claim higher rate relief. Is this in addition to reducing my taxable income?

    What form does that higher relief take? Is it a cheque from HMRC, or some form of credit?
    Originally posted by Gandhi
    ....but you will be paying UK tax??

    Your SIPP contribution comes out of taxed income, so no, your adjusted income does not become 68,000. The provider reclaims the tax and adds that direct to your SIPP. Higher rate relief is claimed through your UK self assessment tax return; any refund due is paid by BACS if you provide your bank details on the self assessment form. HMRC are less keen on sending out refunds by cheque for security reasons, but they will do it if you don't provide bank details.
    • Linton
    • By Linton 9th Apr 18, 3:12 PM
    • 9,714 Posts
    • 9,956 Thanks
    Linton
    • #4
    • 9th Apr 18, 3:12 PM
    • #4
    • 9th Apr 18, 3:12 PM
    You dont get 2 bites of the cherry. If your gross income is 100K the overall effect is that x goes into your pension and your tax is calculated as if you had an income of 100K-x.

    The complications arise because most people paying into personal pensions have aleady been taxed under PAYE and are basic rate tax payers. The automatic refund of basic rate tax into the pension minimises the administration for the majority of people and means that they dont have to fill out a tax return.
    Last edited by Linton; 09-04-2018 at 3:24 PM.
    • Gandhi
    • By Gandhi 9th Apr 18, 3:46 PM
    • 2 Posts
    • 0 Thanks
    Gandhi
    • #5
    • 9th Apr 18, 3:46 PM
    • #5
    • 9th Apr 18, 3:46 PM
    Thanks for the help so far - I'm slightly wiser.

    Again, I apologise for my knowledge gaps, I've never used self assessment before.

    Maybe a better way to phrase one of my questions is:

    Is the total amount payable in income tax, when all is said and done, similar to a salary of 68k, having put 32k into a SIPP?

    I'm trying to make sense of the MSE tax calculator, using an income of 100k with 32k contributed to pension.

    It gives a taxable wage of 56,137, (which is 100k minus 32k SIPP contributions and personal allowance) and a tax payable of 15,555.

    Under pension, it lists my 32k contributions and 'pension HMRC' 21,336.

    If this income tax payable is correct, what will the value of my SIPP be, and any higher rate relief BACS payment.

    Sorry if the answer is staring me in the face!
    • Brynsam
    • By Brynsam 9th Apr 18, 5:16 PM
    • 1,568 Posts
    • 1,137 Thanks
    Brynsam
    • #6
    • 9th Apr 18, 5:16 PM
    • #6
    • 9th Apr 18, 5:16 PM
    Pension contributions can be made in one of two ways: net pay, where pension contributions are collected before income tax. Full tax relief at the highest rate is automatic and no income tax is paid on the money you contribute to a pension. The alternative system is called relief at source (which is how SIPP contributions are handled) - you make pension contributions after tax has been deducted, the pension provides reclaims basic rate tax and adds this to your SIPP, and you claim higher rate tax relief (if appropriate) via your self assessment tax return.

    I think you're being misled by the MSE tax calculator - leave the box on pensions blank and you should find life suddenly looks much clearer.
    • Linton
    • By Linton 9th Apr 18, 5:21 PM
    • 9,714 Posts
    • 9,956 Thanks
    Linton
    • #7
    • 9th Apr 18, 5:21 PM
    • #7
    • 9th Apr 18, 5:21 PM
    Just ignore the Pension[HMRC]. I have no idea what it means, but it doesnt affect anything else. Interestingly its higher if you say you are in Scotland.

    The value of the SIPP is 32K assuming you can tell your provider that you are making a gross payment. Pension contributions are (almost) always quoted as gross. Presumably since you dont pay tax via PAYE but just via your annual return there wont be any higher rate refund - HMRC wont charge you the higher rate tax on the pension payment in the first place. People who are paid their wages under PAYE will have already been charged higher rate tax which is why they get a refund.

    It you can only make net pension payments you should actually put in 80% of the 32K. HMRC will add in the rest.
    Last edited by Linton; 09-04-2018 at 5:25 PM.
    • Linton
    • By Linton 9th Apr 18, 5:28 PM
    • 9,714 Posts
    • 9,956 Thanks
    Linton
    • #8
    • 9th Apr 18, 5:28 PM
    • #8
    • 9th Apr 18, 5:28 PM
    Pension contributions can be made in one of two ways: net pay, where pension contributions are collected before income tax. Full tax relief at the highest rate is automatic and no income tax is paid on the money you contribute to a pension. The alternative system is called relief at source (which is how SIPP contributions are handled) - you make pension contributions after tax has been deducted, the pension provides reclaims basic rate tax and adds this to your SIPP, and you claim higher rate tax relief (if appropriate) via your self assessment tax return.

    I think you're being misled by the MSE tax calculator - leave the box on pensions blank and you should find life suddenly looks much clearer.
    Originally posted by Brynsam
    This is more for people paying pensions through their employer. In the OPs case it appears he receives his wages gross and his tax isnt worked out and paid until after the end of the tax year. So the simplest is to make gross payments into the SIPP, but whether one can I dont know.
    • Dox
    • By Dox 9th Apr 18, 5:29 PM
    • 936 Posts
    • 718 Thanks
    Dox
    • #9
    • 9th Apr 18, 5:29 PM
    • #9
    • 9th Apr 18, 5:29 PM
    If you put 32,000 into your SIPP (and you are paying tax in England/Wales), 8,000 is claimed by the SIPP provider and put in your SIPP = 40,000.

    You claim higher rate relief on your 32,000 and that is paid to you via HMRC (8,000).

    So your SIPP contribution of 40,000 (normally the maximum amount you can contribute in a year and get tax relief) 'costs' you only 24,000.
    • Dox
    • By Dox 9th Apr 18, 5:31 PM
    • 936 Posts
    • 718 Thanks
    Dox
    This is more for people paying pensions through their employer. In the OPs case it appears he receives his wages gross and his tax isnt worked out and paid until after the end of the tax year. So the simplest is to make gross payments into the SIPP, but whether one can I dont know.
    Originally posted by Linton
    Not unless it's an employer contribution - and I think from what OP says he is going to become subject to UK tax (otherwise none of this works!).
    • Linton
    • By Linton 9th Apr 18, 5:41 PM
    • 9,714 Posts
    • 9,956 Thanks
    Linton
    Not unless it's an employer contribution - and I think from what OP says he is going to become subject to UK tax (otherwise none of this works!).
    Originally posted by Dox
    Just checked - one can make gross contributions to a SIPP and not get the tax refund paid into the SIPP. This would be appropriate for the OP since he is paid gross.

    However if he can get an early basic rate tax refund on tax that hasnt actually been paid that would seem to be worth doing. Whether it is legal I have no idea. In that case he should pay in 80% of the 32K he wants to contribute=25600.
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