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SIPP Investment

Including Financial Independence and Retiring Early (FIRE)
innocuous
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SIPP Investment

#351527

Postby innocuous » October 29th, 2020, 6:16 am

Hi,

Just wondering if anyone can clarify what happens with SIPP investments as a higher rate Tax Payer. For context I earn £~112k per year from a single employer. I do already invest in a pension with the employer and have increased my voluntary contributions to 4% as part of their matching scheme. As a higher rate tax payer my 'Tax Free Allowance' gets taken away from me at a rate of £2 for every £1 over the £100k threshold. As I understand it, if I were to invest in a SIPP, I would not only get the regular tax back, but I would also get back my 'Tax Free Allowance'?

Is this correct?

Lastly I would like to understand how the tax free allowance is given back to me? Is it simply applied to my SIPP, or will I get a rebate of it when I submit my tax return?

The reason that I ask, is that I would prefer to invest in S&S ISA's. I just have a funny feeling that later down the line Mr Government might come knocking on the door of private pensions to help make-up their shortfall.....ISA's are also more flexible if I want to use the funds for other purposes such as property investments, or private school fee's etc.

Thanks for your help,

J

JuanDB
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Re: SIPP Investment

#351542

Postby JuanDB » October 29th, 2020, 7:27 am

Hi innocuous,

Yes, your pension contributions are tax free and can be used to reduce income below the 100k threshold and move you out of the personal allowance taper. Income between 100k and 125k has an effective tax rate of 60% so using pension contributions to offset this makes a lot of sense.

The most effective way to achieve this, if your employer supports it, is salary sacrifice which will sort out the tax at source as contributions are paid gross by your employer. They may also add in the NI contributions which adds another 13.8% on top. The 70%+ tax + NI boost on those contributions is pretty tough to beat.

If you don’t want the contributions to remain in your employers pension scheme you can do a transfer to a SIPP provider of your choice. Usually at no cost, and as long as you leave the required amount in your employer pension it will be unaffected so you can repeat every year or so.

If you make contributions to your SIPP then the provider will reclaim basic rate tax which will be paid into your SIPP, normally within 2-3 months of you making the deposit. You reclaim anything above this via your tax return. You cannot reclaim national insurance via this route.

Thanks,

Juan.

Adamski
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Re: SIPP Investment

#351740

Postby Adamski » October 29th, 2020, 3:38 pm

I'm not a higher rate tax payer now, but when I was it worked like this. You'd pay into the sipp £80, automatic tax relief will be added 25th of following month £20, so you get £100 in total. Claim additional tax relief through your tax code or self assessment tax return. I claimed through tax code by phoning hmrc. You got to be careful your total contributions, from workplace and sipp: employees, employers plus tax relief in total is under £40k or 100% of earnings whichever is lower.

Urbandreamer
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Re: SIPP Investment

#351747

Postby Urbandreamer » October 29th, 2020, 4:09 pm

Adamski wrote:You got to be careful your total contributions, from workplace and sipp: employees, employers plus tax relief in total is under £40k or 100% of earnings whichever is lower.


I think that it might just be a bit more complicated than that. If you earn £40kpa, then "only" £27.5k is taxable. Hence unless you have unused contributions from previous years you should not get tax relief upon personal contributions in excess of that figure. Employers contributions and salary sacrifice are additional complications.

Of course it doesn't affect the OP, but might be worth some of us paying attention to.

swill453
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Re: SIPP Investment

#351749

Postby swill453 » October 29th, 2020, 4:14 pm

Urbandreamer wrote:
Adamski wrote:You got to be careful your total contributions, from workplace and sipp: employees, employers plus tax relief in total is under £40k or 100% of earnings whichever is lower.


I think that it might just be a bit more complicated than that. If you earn £40kpa, then "only" £27.5k is taxable. Hence unless you have unused contributions from previous years you should not get tax relief upon personal contributions in excess of that figure.

I don't think that's the case. I believe if you earn, say, £12.5K and pay no tax, you can still pay £12.5K into a pension and get £3125 tax relief.

Scott.

ursaminortaur
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Re: SIPP Investment

#351964

Postby ursaminortaur » October 30th, 2020, 12:51 pm

Urbandreamer wrote:
Adamski wrote:You got to be careful your total contributions, from workplace and sipp: employees, employers plus tax relief in total is under £40k or 100% of earnings whichever is lower.


I think that it might just be a bit more complicated than that. If you earn £40kpa, then "only" £27.5k is taxable. Hence unless you have unused contributions from previous years you should not get tax relief upon personal contributions in excess of that figure. Employers contributions and salary sacrifice are additional complications.

Of course it doesn't affect the OP, but might be worth some of us paying attention to.


No if you earn £40,000 you can contribute £32,000 and then the government add £8,000 to bring it upto £40,000. The fact that the standard personal allowance for 2020/21 means that you haven't actually paid tax on the first £12,500 doesn't have any effect on that. Indeed if you only earned £12,500 you would still be able to contribute £10,000 and the government would still add in £2,500 to bring it up to £12,500.

(And, of course, if you have no relevant earnings at all you can still contribute £2880 and get £720 added by the government - making a gross contribution of £3,600)

hiriskpaul
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Re: SIPP Investment

#352132

Postby hiriskpaul » October 31st, 2020, 10:29 am

innocuous wrote:Hi,

Just wondering if anyone can clarify what happens with SIPP investments as a higher rate Tax Payer. For context I earn £~112k per year from a single employer. I do already invest in a pension with the employer and have increased my voluntary contributions to 4% as part of their matching scheme. As a higher rate tax payer my 'Tax Free Allowance' gets taken away from me at a rate of £2 for every £1 over the £100k threshold. As I understand it, if I were to invest in a SIPP, I would not only get the regular tax back, but I would also get back my 'Tax Free Allowance'?

Is this correct?

Yes. Contributing to a pension/SIPP would reduce your "adjusted net income". The personal allowance is reduced by £1 for every £2 of adjusted net income above £100,000.
https://www.gov.uk/guidance/adjusted-net-income

Lastly I would like to understand how the tax free allowance is given back to me? Is it simply applied to my SIPP, or will I get a rebate of it when I submit my tax return?

As others have said, basic rate tax is paid into the SIPP. The remaining tax relief will be repaid after you file your tax return.

The reason that I ask, is that I would prefer to invest in S&S ISA's. I just have a funny feeling that later down the line Mr Government might come knocking on the door of private pensions to help make-up their shortfall.....ISA's are also more flexible if I want to use the funds for other purposes such as property investments, or private school fee's etc.

Thanks for your help,

J

In your position, contributing to a SIPP is financially far superior to contributing to an ISA and unless you have a good reason not to, maxing out pension contributions before paying into ISAs is the way to go. If you can go down the salary sacrifice route with your employer, that is even better.

You may end up exceeding the Lifetime Allowance by making large pension contributions, but I would not concern yourself with that. Even if you do have to pay an LTA charge at some point, the maths is still significantly in favour of pension contributions for higher/additional rate taxpayers.


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