Starting a SIPP

[csearle]

I was chatting to a friend the other day about SIPPs and am now thinking about opening one as a way of taking advantage of the basic rate tax relief afforded i.a. to the self-employed. I have cash that I wish to get ISA'd over the next few years (I'm 61).

IIUC I can put up to my income¹ each tax year into a SIPP. There is some suggestion in the blurb that I can take advantage of the unused allowances of the preceding three years.

I have two questions:

1. Can I effectively open a SIPP with four years' worth of income?
2. I never know what my income is until after the end of a tax year so how do I choose the right amount?

Thanks for any help,
Chris



¹ I earn much less than the £40K annual limit.

[ursaminortaur]

I was chatting to a friend the other day about SIPPs and am now thinking about opening one as a way of taking advantage of the basic rate tax relief afforded i.a. to the self-employed. I have cash that I wish to get ISA'd over the next few years (I'm 61).

IIUC I can put up to my income¹ each tax year into a SIPP. There is some suggestion in the blurb that I can take advantage of the unused allowances of the preceding three years.

I have two questions:

1. Can I effectively open a SIPP with four years' worth of income?
2. I never know what my income is until after the end of a tax year so how do I choose the right amount?

Thanks for any help,
Chris



¹ I earn much less than the £40K annual limit.

You can only get tax-relief on your gross earnings for the current year and you have to have used up this year's annual allowance of £40k before you can use carry-forward to make use of unused annual allowance from the previous three years. Thus if your earnings this year are less than £40k you won't be able to use carry-forward to make use of any unused allowance from the previous three years.

Also, if you did earn more than £40k gross this year, in order to have unused allowance from those three previous years you will have needed to have been in a pension scheme during those years even if you didn't actually make any contributions during those years. If you weren't in a pension scheme at all then you won't have unused allowances.

https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/carry-forward

Carry forward allows you to make use of any annual allowance that you may not have used during the three previous tax years, provided that you were a member of a registered pension scheme. You can use carry forward if you’re an active member currently building up pension benefits, a deferred member with paid-up pension benefits, a pensioner member in receipt of pension benefits from your pension scheme or a pension credit member where you have a share of your ex-partner’s pension.
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To use carry forward, you must make the maximum allowable contribution in the current tax year (£40,000 in 2021/22) and can then use unused annual allowances from the three previous tax years, starting with the tax year three years ago.

You can’t receive tax relief on contributions in excess of your earnings in a tax year and you only receive higher rate tax relief to the extent that you have paid it.

If a particular tax year’s unused annual allowance is not fully used, it can only be carried forward for up to three years, after which it is lost.

[csearle]

You can only get tax-relief on your gross earnings for the current year and you have to have used up this year's annual allowance of £40k before you can use carry-forward to make use of unused annual allowance from the previous three years.

Thank you ever so much. That was very clear and useful.

Chris

[wanderer]

You can only get tax-relief on your gross earnings for the current year and you have to have used up this year's annual allowance of £40k before you can use carry-forward to make use of unused annual allowance from the previous three years.

Thank you ever so much. That was very clear and useful.

Chris

Chris, if your earnings are less than 40k - as in your case - then the rules are that you can put in up to 100% of your earnings for the most recent tax year before doing carry back. Once you have used up 100% of your earnings for this year you can then also look back three years and start using up allowances from those years (oldest year first.)

You don't have to use up the full 40k allowance before carrying back - just 100% off your earnings.

Also, as noted above, you need to have been a member of a UK pension scheme of some description in the years where you now want to use carry back. However, that could be any scheme, it doesn't have to be the SIPP you are paying into.

[ursaminortaur]

You can only get tax-relief on your gross earnings for the current year and you have to have used up this year's annual allowance of £40k before you can use carry-forward to make use of unused annual allowance from the previous three years.

Thank you ever so much. That was very clear and useful.

Chris

Chris, if your earnings are less than 40k - as in your case - then the rules are that you can put in up to 100% of your earnings for the most recent tax year before doing carry back. Once you have used up 100% of your earnings for this year you can then also look back three years and start using up allowances from those years (oldest year first.)

You don't have to use up the full 40k allowance before carrying back - just 100% off your earnings.

Also, as noted above, you need to have been a member of a UK pension scheme of some description in the years where you now want to use carry back. However, that could be any scheme, it doesn't have to be the SIPP you are paying into.

Carry back was abolished in 2006. You can now only carry forward unused allowances. Carry-forward basically just adds the previous years unused annual allowances to this year's annual allowance.

If your gross earnings for this year are less than £40k then your contribution will be deemed to come from this year's annual allowance.
You only get to use previous years unused allowance once this year's annual allowance has been used up which means that your earnings have to be greater than £40k. If your earnings are so large that the annual allowance taper reduces the annual allowance then you would first have to use the current year's tapered annual allowance before being able to carry-forward unused (tapered) annual allowance from the previous three years - but, of course, to be in that situation your gross earnings would have to be a lot more than £40k.
The other situation in which the annual allowance is reduced is if you have taken drawdown and the MPAA has kicked in - however in that case you are explicitly forbidden from using carry-forward.

[wanderer]

ursaminortaur - you are completely right and I am completely wrong. Apologies. I should have checked my facts before posting. I was obviously working on the basis of remembering the old rules. My only defence is that the rules change so often it is difficult to know what's what these days - but no excuse. Chris, my apologies also for muddying the waters.

[ursaminortaur]

ursaminortaur - you are completely right and I am completely wrong. Apologies. I should have checked my facts before posting. I was obviously working on the basis of remembering the old rules. My only defence is that the rules change so often it is difficult to know what's what these days - but no excuse. Chris, my apologies also for muddying the waters.

That's fine - we all make mistakes sometimes and, as you say, Governments interfere in pensions so often that it is sometimes difficult to keep it all straight in your head without checking.

PS. Thanks for adding in the clarification about not needing to have been in the same scheme that you are paying into but just needing to have been in a pension scheme during those previous three years. I should have made that clearer in my post.

[GrahamPlatt]

Novice question, but I’m perplexed. The rules are that someone can put 100% of their annual income into a SIPP.
Imagine that’s £25k. The SIPP is then automatically “topped up” by 20%. What, on all of it? Because they’ve only been taxed on £25k-personal allowance; circa £25k-£11k = £14k, i.e. £2.8k tax paid…

perhaps best asked in pensions practical problems, but this thread came up on a search.

[EthicsGradient]

Yes, on all of it. The point is that they'll be taxed on the withdrawals later; if they didn't get tax relief on it now, they'd be worse off than just keeping the money and spending it after retirement. Similarly, someone with no earned income at all is allowed to contribute up to £2,880/year; the administrator claims tax relief on that, so the total becomes £3,600.

And note your earned income is the *gross* limit; so if you earn £25k, then you can contribute up to £20k, and that will be topped up to £25k.

[absolutezero]

I was chatting to a friend the other day about SIPPs and am now thinking about opening one as a way of taking advantage of the basic rate tax relief afforded i.a. to the self-employed. I have cash that I wish to get ISA'd over the next few years (I'm 61).

IIUC I can put up to my income¹ each tax year into a SIPP. There is some suggestion in the blurb that I can take advantage of the unused allowances of the preceding three years.

I have two questions:

1. Can I effectively open a SIPP with four years' worth of income?
2. I never know what my income is until after the end of a tax year so how do I choose the right amount?

Thanks for any help,
Chris



¹ I earn much less than the £40K annual limit.

1. No. You had to be a member of a pension scheme in each of those 4 years.
AND (here is the important bit).
Let's say you have unused allowances from the last 3 years totalling £90,000 want to put an extra £90,000 in this year
YOU HAD TO EARN £90,000 THIS YEAR to be able to do that. That's on top of using ALL your allowance from this year first.

2. You have to guess. Or do as I do and drip feed it in over the year as you know your earnings.

[absolutezero]

Novice question, but I’m perplexed. The rules are that someone can put 100% of their annual income into a SIPP.
Imagine that’s £25k. The SIPP is then automatically “topped up” by 20%. What, on all of it? Because they’ve only been taxed on £25k-personal allowance; circa £25k-£11k = £14k, i.e. £2.8k tax paid…

perhaps best asked in pensions practical problems, but this thread came up on a search.

My understanding is yes. (That's what happened on my tax returns anyway)
If you have no earnings at all you can pay in (I think £2,800) and get the 20% relief on that despite having paid no tax.

[absolutezero]

And note your earned income is the *gross* limit; so if you earn £25k, then you can contribute up to £20k, and that will be topped up to £25k.

Worth highlighting this.
The amount you can pay in includes both your contribution and the tax man's contribution.

My understanding is if you go over (which I believe you are allowed to - though some SIPP providers won't let you), you just have to pay back the tax relief.
Check all this but that's what my understanding is.

Though I'd be miffed at losing the free 25% uplift so I would stay under the allowance.

[kempiejon]

Novice question, but I’m perplexed. The rules are that someone can put 100% of their annual income into a SIPP.
Imagine that’s £25k. The SIPP is then automatically “topped up” by 20%. What, on all of it? Because they’ve only been taxed on £25k-personal allowance; circa £25k-£11k = £14k, i.e. £2.8k tax paid…

perhaps best asked in pensions practical problems, but this thread came up on a search.

Others have answered yes to most of this and a wrinkle perhaps for others if you're in another pension scheme like with your employer you'd need to deduct those elements from your gross amount. Those in defined benefits pensions need to do some sums to asses the input value of the DB pension.
here's the website I use https://www.mandg.com/pru/tools-calcula ... index.html

[hiriskpaul]

Worth pointing out I think that you can only pay in 100% of employment earnings, capped at £40k. Income from property, savings and investments don't count.

Edit: Or £3600 gross if you have no employment earnings. That one is well worth thinking about. After retirement, for non-earning spouses, etc.

[BullDog]

Worth pointing out I think that you can only pay in 100% of employment earnings, capped at £40k. Income from property, savings and investments don't count.

Edit: Or £3600 gross if you have no employment earnings. That one is well worth thinking about. After retirement, for non-earning spouses, etc.

One exception is if you're a director of a limited company. The limited company can pay £40k per year into the director's pension plan should it choose to. No need to pay the director anything as salary.

(Some people describe themselves as self employed when they are a company director. Strictly, you're then not self employed, you're an officer of the company. I'm not saying this applies to the OP. But it's a useful way for a person with their own company to get money into their pension. The limited company gets corporation tax relief on the contribution).

[Alaric]

No need to pay the director anything as salary.

That's a long standing arbitrage which HMRC and various Chancellors have attempted to eliminate. The basic point is to take up to the personal allowance as salary and anything over that as dividends. Dividends are paid after Corporation Tax but that is at a lower rate than Income Tax & NI. Also the tax is lower on dividends because of their after Corporation Tax status.

[hiriskpaul]

Worth pointing out I think that you can only pay in 100% of employment earnings, capped at £40k. Income from property, savings and investments don't count.

Edit: Or £3600 gross if you have no employment earnings. That one is well worth thinking about. After retirement, for non-earning spouses, etc.

One exception is if you're a director of a limited company. The limited company can pay £40k per year into the director's pension plan should it choose to. No need to pay the director anything as salary.

(Some people describe themselves as self employed when they are a company director. Strictly, you're then not self employed, you're an officer of the company. I'm not saying this applies to the OP. But it's a useful way for a person with their own company to get money into their pension. The limited company gets corporation tax relief on the contribution).

Yes, I had forgotten that. The employer's contribution is not restricted by salary, unlike employee's contribution.

Total employer(s) plus employee contributions must be less than the annual allowance.

[Dod101]

Novice question, but I’m perplexed. The rules are that someone can put 100% of their annual income into a SIPP.
Imagine that’s £25k. The SIPP is then automatically “topped up” by 20%. What, on all of it? Because they’ve only been taxed on £25k-personal allowance; circa £25k-£11k = £14k, i.e. £2.8k tax paid…

perhaps best asked in pensions practical problems, but this thread came up on a search.

My understanding is yes. (That's what happened on my tax returns anyway)
If you have no earnings at all you can pay in (I think £2,800) and get the 20% relief on that despite having paid no tax.

You will only get the tax credit up to age 75. Under that age though you can pay in £2,800 and get the 20% tax added, so an additional £700. (an equivalent £3,500 gross)

[DrFfybes]

You're an experienced electrician in London earning much less than £40k???

Fancy a week's holiday in Shropshire

[csearle]

You're an experienced electrician in London earning much less than £40k???

Fancy a week's holiday in Shropshire

Although this thread has been rekindled after many months and, as such, is a tad out-of-date, yes. I'm not in London but in Tunbridge Wells and am managing about £30Kish pa (but then I'm a rubbish businessman). I pride myself on the quality of my work though. I have worked on the Isle of Skye (sub-contracting) for Neil Gaiman, my record distance from home, and been paid within 60s, my record for settlement. So Shrophire would be no problem Paul.

C.

PS I somehow had you in Exeter?
PPS This is not an advert.