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