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Private SIPP Investment - Personal Allowance Clawback

Including Financial Independence and Retiring Early (FIRE)
innocuous
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Private SIPP Investment - Personal Allowance Clawback

#360781

Postby innocuous » November 28th, 2020, 4:15 am

Hi all,

Trying to work-out the best way to invest my money and I am running some scenarios and would like to validate my assumptions regarding payment into a SIPP. This particular question is about the savings made from clawback of my personal allowance. Can you please check my assumptions below as the benefits of pensions contributions seems crazy favourable and I want to ensure this is right.

By my calculations, if my theoretical earnings were 125k per annum (and lets ignore the company pension scheme which is claimed on net pay for this), if I were to pay 25k into a SIPP pensions scheme the following would come true:

    The pension scheme would automatically apply the basic rate of tax to my investment currently 20%. For a payment of £25k / 0.8 = £31,250 would appear in my pension.
    In my self assessment I would get back a payment of the remaining higher rate tax (40% - basic rate 20% = 20%). I would therefore get a rebate of (£25k / 0.8) - £25k = £6,250
    I would also get back via a rebate in my self assessment my personal allowance at a rate of 50p for every pound invested up to the total personal allowance £12.5k. £25k \ 2 = £12.5k

Based on the above, for an initial investment of £25k, I would get a total pension contribution of £31,250, and a rebate in the following tax year of (£6,250+£12,500) = £18,750 meaning for a total cost of £6,250 I have invested £31,250 in my pension?

As I said, the figures seem incredibly beneficial, hence why I would really value your advice.

Thanks,

Jon

innocuous
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Re: Private SIPP Investment - Personal Allowance Clawback

#360782

Postby innocuous » November 28th, 2020, 4:30 am

I think I know where I am going wrong now....as I start to get my personal allowance back, I no longer am paying higher and lower rate of tax on that. Therefore I need to deduct the 40% tax rate off of my calculations as I am gaining my personal allowance back, but as a result not paying tax in that upper threshold anymore.

So the way I now read this is that:
earning 125k with a pay in to the SIPP of 25k means that:
    £31,250 gets applied to the SIPP - this is as you get 20% basic tax relief on pensions contributions even on the 12.5k personal allowance
    I would get the entire £12.5k personal allowance back
    I would not get higher rate tax relief

This would mean that or an actual pay-in of £25k I would get £31,250 applied to my pension, but £12.5k back in my tax return meaning the pension contribution has actually only really cost me £12.5k.

Make sense?

TUK020
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Re: Private SIPP Investment - Personal Allowance Clawback

#360790

Postby TUK020 » November 28th, 2020, 8:09 am

Slight complication is that you are just looking at tax, and not NI.
Between 100-125k in gross earnings, you are on a marginal tax + NI rate of 62%, including clawback of personal allowance.
It absolutely makes sense to put enough into pension to suppress your gross earnings to below 100k.

Then when you hit LTA on pension, it starts making sense to work less, and take more time off.
Tax system is silly and a disincentive to work more.

tuk020 (on 4 days a week now)

innocuous
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Re: Private SIPP Investment - Personal Allowance Clawback

#360819

Postby innocuous » November 28th, 2020, 10:47 am

TUK020 wrote:Slight complication is that you are just looking at tax, and not NI.
Between 100-125k in gross earnings, you are on a marginal tax + NI rate of 62%, including clawback of personal allowance.
It absolutely makes sense to put enough into pension to suppress your gross earnings to below 100k.

Then when you hit LTA on pension, it starts making sense to work less, and take more time off.
Tax system is silly and a disincentive to work more.

tuk020 (on 4 days a week now)


Good point. So by my calculation I would be getting 2% NI back on my earnings above £50,024. So if I put £25k in my pension, I would in reality get and extra £510.20 back in my tax return [(£25k / 0.98) - £25k]

Thanks for the help/understanding.

Myfyr
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Re: Private SIPP Investment - Personal Allowance Clawback

#360844

Postby Myfyr » November 28th, 2020, 11:42 am

Unless you are using salary sacrifice you will still be paying NI which you cnnot claim back.

If earning £125k, paying £25k net into your pension has the following effect ...

(1) Pension provider claims £6,250 tax relief which goes in your pension.

(2) Higher rate tax relief of £6,250 is paid to you from your tax return.

(3) Your earnings have dropped below £100k so you get your personal allowance of £12,500 back. You therefore get back £12,500 x 20% = £2,500 on your tax return.

Therefore £31,250 in pension costs you £25,000 - £6,250 - £2,500 = £16,250

I think this is correct. :)

Edit: tax calculator shows £42,500 income tax on £125,000 and and £25,000 income tax on £93,750 which is a difference of £17,500 so something is wrong somewhere in my figures.

Myfyr
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Re: Private SIPP Investment - Personal Allowance Clawback

#360851

Postby Myfyr » November 28th, 2020, 12:01 pm

Myfyr wrote:Unless you are using salary sacrifice you will still be paying NI which you cnnot claim back.

If earning £125k, paying £25k net into your pension has the following effect ...

(1) Pension provider claims £6,250 tax relief which goes in your pension.

(2) Higher rate tax relief of £6,250 is paid to you from your tax return.

(3) Your earnings have dropped below £100k so you get your personal allowance of £12,500 back. You therefore get back £12,500 x 20% = £2,500 on your tax return.

Therefore £31,250 in pension costs you £25,000 - £6,250 - £2,500 = £16,250

I think this is correct. :)

Edit: tax calculator shows £42,500 income tax on £125,000 and and £25,000 income tax on £93,750 which is a difference of £17,500 so something is wrong somewhere in my figures.


Difference is £1,250 which is 20% of £6,250 so i have double counted this relief somewhere probably by using income of £93,750 (£125,000 - £31,250) instead of £100,000 post the pension contribution.

innocuous
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Re: Private SIPP Investment - Personal Allowance Clawback

#361130

Postby innocuous » November 29th, 2020, 11:25 am

Myfyr wrote:
Myfyr wrote:
Edit: tax calculator shows £42,500 income tax on £125,000 and and £25,000 income tax on £93,750 which is a difference of £17,500 so something is wrong somewhere in my figures.


Difference is £1,250 which is 20% of £6,250 so i have double counted this relief somewhere probably by using income of £93,750 (£125,000 - £31,250) instead of £100,000 post the pension contribution.


I think this is wrong too. I am doing more digging and found that most websites all say different things to each other. I also started looking at this the other way around, to see how much tax I owe on theoretical earnings and discovered that even the Governments website calculator is incorrect and claiming that personal allowance is given over 100k which it clearly isnt - https://www.gov.uk/income-tax-rates/income-over-100000

I do think the Government rules are playing fast and loose with the wording "lose personal allowance". Ok yes it is being lost, but intuitively my presumption would be that it would fall into the basic rate of tax that start after the personal allowance up to 50k. This is not what is happening according to all of the tax accountancy websites. What is actually happening is that the tax is being applied at the highest rate of tax, in this case 40%.

This isnt made clear anywhere, but it seems to be happening. This supports all the new articles saying that the tax rate at £125,018 is 60%.

Going to carry on calculations. I am building a spreadsheet that might be useful to others.

sunnyjoe
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Re: Private SIPP Investment - Personal Allowance Clawback

#361238

Postby sunnyjoe » November 29th, 2020, 5:48 pm

TUK020 wrote:Slight complication is that you are just looking at tax, and not NI.
Between 100-125k in gross earnings, you are on a marginal tax + NI rate of 62%, including clawback of personal allowance.
It absolutely makes sense to put enough into pension to suppress your gross earnings to below 100k.

Then when you hit LTA on pension, it starts making sense to work less, and take more time off.
Tax system is silly and a disincentive to work more.

tuk020 (on 4 days a week now)


Or (if this option is available to you and you want one) you could get a salary sacrifice agreement on an electric car with 0% BIK this year (1% next year and 2% following year)


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