SIPP payments, and tax return

[AleisterCrowley]

Evenin all
I made some payments into a new SIPP last tax year (22/23)
I'm currently doing my return and there is a section Paying into registered pension schemes and overseas pension schemes
There's a box ;
Payments to registered pension schemes (also known as PPR) where basic rate tax relief will be claimed by your pension provider (called 'relief at source'). Enter the payments and basic rate tax:
Do I simply put my 22/23 payments plus tax relief claimed by AJ Bell in this box?
It was a series of lump sums using up my carry over allowance from previous years. I took voluntary redundancy 31 Dec 22 so no option to increase sal sac contributions.
Why do HMRC neeed this? Will it affect my tax return ? I assume not as the payments are from taxed salary and the relief is done by AJ Bell. Can't see how it would change my tax situation

[pochisoldi]

Do I simply put my 22/23 payments plus tax relief claimed by AJ Bell in this box?

Correct

So if you paid in £80, you enter £100.

If you pay in another amount, divide it by 0.8 and enter that amount.

You need to enter this figure as you get tax relief at your marginal rate. HMRC achieve this by extending your basic rate band by the amount of gross contributions.

I think that HMRC basically want everything in that section as "gross" figures. There's another box in that section- "Payments to a retirement annuity contract (Also known as RAR) where basic rate tax relief will not be claimed by your provider") - that box is "gross" as well.
The idea is to keep it "simple" by keeping it uniform. If you had a mix of "net" and "gross" boxes, HMRC would have a significant number of "customers" who would make a mistake and then generate a load of work later on.

PochiSoldi

[AleisterCrowley]

Do I simply put my 22/23 payments plus tax relief claimed by AJ Bell in this box?

Correct

So if you paid in £80, you enter £100.

If you pay in another amount, divide it by 0.8 and enter that amount.

You need to enter this figure as you get tax relief at your marginal rate. HMRC achieve this by extending your basic rate band by the amount of gross contributions.
...
PochiSoldi

Really? I get tax relief within the SIPP, as AJ Bell claim the 'top up' so no further action I thought

[edit]
Rereading you mean the additional tax relief on top of the basic 20% claimed by SIPP provider?
This seems generous of HMRC - I would have expected them to only allow additional relief on contributions above £50,200 (which is possible with carry forward) In other words the contribution part that pokes its head into the 40% band

[mc2fool]

Correct

So if you paid in £80, you enter £100.

If you pay in another amount, divide it by 0.8 and enter that amount.

You need to enter this figure as you get tax relief at your marginal rate. HMRC achieve this by extending your basic rate band by the amount of gross contributions.
...
PochiSoldi

Really? I get tax relief within the SIPP, as AJ Bell claim the 'top up' so no further action I thought

[edit]
Rereading you mean the additional tax relief on top of the basic 20% claimed by SIPP provider?
This seems generous of HMRC - I would have expected them to only allow additional relief on contributions above £50,200 (which is possible with carry forward) In other words the contribution part that pokes its head into the 40% band

Yes, and extending the basic rate band is how that's achieved.

Payments into pensions are supposed to be free of tax, i.e. out of gross income, and if you are just a basic rate taxpayer then all the relief you're going to get is dealt with at source by the SIPP provider and, while you should still fill in the box you're referring to, it won't make any difference to your bottom line tax return.

If, however, you are a higher rate taxpayer then by extending your basic rate band by the amount of your gross (of 20% tax) contributions that drops that amount of your income out of the 40% rate back into the 20% rate, and so you pay 20% less tax (i.e. get the additional 20% relief) on that amount.

[Adamski]

Why does hmrc need to know this? They're checking that you've not paid in over the pension allowance. Some people inadvertently pay more than allowed into their pension. If you do, they will charge you an annual allowance charge.

In addition they'll work out if you'll get higher rate tax relief if applicable. That'll be automatically in their tax calculation.

[AleisterCrowley]

Thanks Mc2fool- I'll just be into the 40% band for 22/23 despite my best efforts, probably by £1k or so
So this means the SIPP contributions are effectively 'top down' ?
As an example
Person A
earns £60k
Puts £10k into SIPP
This would put all income into the 20% band?
I would have expected the view to have been that the £10k 'came out of' the first £10k of taxable earnings,
Assume this would also flip the annual interest allowance (PSA) back to £1k rather than £500?

[mc2fool]

Thanks Mc2fool- I'll just be into the 40% band for 22/23 despite my best efforts, probably by £1k or so
So this means the SIPP contributions are effectively 'top down' ?
As an example
Person A
earns £60k
Puts £10k into SIPP
This would put all income into the 20% band?
I would have expected the view to have been that the £10k 'came out of' the first £10k of taxable earnings,

If you think about it it doesn't make any difference which way "up" you look at it. Pension contributions are meant to be free of tax; i.e. they do not contribute to your taxable income. If you earn £60K and you put £10K (gross of 20%) into a SIPP, then your taxable income drops to £50K. It doesn't matter if it's the "first" £10K or "last" £10K, 60 minus 10 is still 50!

If (for simplicity) the HRT threshold were exactly £50K, then what would have happened is you'd have put £8K into the SIPP, which would have been grossed up to £10K by the provider, and then by reducing your HRT threshold by the £10K you'd pay 20% tax on it instead of 40%. So, the (grossed up) £10K in your SIPP costs you £8K out of your bank account and gains you a reduction of £2K in your income tax, so end cost of that £10K gross is £6K net to you.

If, however, you were earning a bit less, say £54K, then only £4K of that would have been in the HRT band (the other £6K already being in BRT) and so the reduction in income tax would only be £800 (but you'd already be paying £1200 less tax on the other £6K anyway) and the end effect is still that the £10K in your SIPP is free of tax.

Assume this would also flip the annual interest allowance (PSA) back to £1k rather than £500?

I would assume so too, but worth checking....

[AleisterCrowley]

Thanks ! - seems clearer now if the principle is 'Pension contributions are meant to be free of tax'
I'll do a few drawings /scribbles to get it straight in my head, as it could have a significant impact this (tax) year - I'm going to be taking lump sums out of my 'main' DC pension (not the SIPP) and need to avoid 40% tax band as I'll also have several savings accounts maturing

[kempiejon]

Thanks ! - seems clearer now if the principle is 'Pension contributions are meant to be free of tax'
I'll do a few drawings /scribbles to get it straight in my head, as it could have a significant impact this (tax) year - I'm going to be taking lump sums out of my 'main' DC pension (not the SIPP) and need to avoid 40% tax band as I'll also have several savings accounts maturing

If it's the first time you take money from that pension then could you not take 25% of the pot tax free lump sum but no income yet and avoid any tax implication - rather than taking an income of which 25% of each payment is tax free?

[AleisterCrowley]

Thanks ! - seems clearer now if the principle is 'Pension contributions are meant to be free of tax'
I'll do a few drawings /scribbles to get it straight in my head, as it could have a significant impact this (tax) year - I'm going to be taking lump sums out of my 'main' DC pension (not the SIPP) and need to avoid 40% tax band as I'll also have several savings accounts maturing

If it's the first time you take money from that pension then could you not take 25% of the pot tax free lump sum but no income yet and avoid any tax implication - rather than taking an income of which 25% of each payment is tax free?

I need to get a reasonable amount out sooner rather than later to buy a house, so wanted to utilise all of my 20% tax band in 23/24 on top of the 25% tax free part of the pots
I haven't started drawing my DB /final salary pension yet (which is only about £12k pa)

[Henke77]

Thanks Mc2fool- I'll just be into the 40% band for 22/23 despite my best efforts, probably by £1k or so
So this means the SIPP contributions are effectively 'top down' ?
As an example
Person A
earns £60k
Puts £10k into SIPP
This would put all income into the 20% band?
I would have expected the view to have been that the £10k 'came out of' the first £10k of taxable earnings,

If you think about it it doesn't make any difference which way "up" you look at it. Pension contributions are meant to be free of tax; i.e. they do not contribute to your taxable income. If you earn £60K and you put £10K (gross of 20%) into a SIPP, then your taxable income drops to £50K. It doesn't matter if it's the "first" £10K or "last" £10K, 60 minus 10 is still 50!

If (for simplicity) the HRT threshold were exactly £50K, then what would have happened is you'd have put £8K into the SIPP, which would have been grossed up to £10K by the provider, and then by reducing your HRT threshold by the £10K you'd pay 20% tax on it instead of 40%. So, the (grossed up) £10K in your SIPP costs you £8K out of your bank account and gains you a reduction of £2K in your income tax, so end cost of that £10K gross is £6K net to you.

If, however, you were earning a bit less, say £54K, then only £4K of that would have been in the HRT band (the other £6K already being in BRT) and so the reduction in income tax would only be £800 (but you'd already be paying £1200 less tax on the other £6K anyway) and the end effect is still that the £10K in your SIPP is free of tax.

Assume this would also flip the annual interest allowance (PSA) back to £1k rather than £500?

I would assume so too, but worth checking....

Long-time lurker here with my first ever post. I was recently also wondering whether your personal-savings allowance can be "reverted" back to £1000 as a consequence of a SIPP contribution that takes you under the 40% tax rate. I suspect, however, the answer is no (although you will of course only pay 20% tax on the taxable interest as opposed to 40%, due to the 20% band being extended). See here:

EDIT: Can't post links but if you Google "Do SIPP contributions bring you below personal savings allowance?" you will see a response from HMRCs community forum as the first entry

On the other hand I think charity contributions can enable the personal-savings allowance to revert back to, say, £1000 from £500. For example, at the top of my P800 is an amount called "your income less total deductions" which includes the net charity contribution as a deduction but not the SIPP contribution. I suspect this is the figure HMRC use to determine what you personal-saving allowance is. Later (halfway down the page) the Total Income figure is quoted which is higher than the "your income less total deductions" figure by an amount equal to the net charity contribution (as you still pay 20% "tax" on the gross charity contribution albeit HMRC send it to the charity, just like they send the SIPP provider 20% of your gross SIPP contribution).

It does seem a bit unfair that contributing to a SIPP cannot alter your personal-saving allowance unlike when you are contributing to a workplace pension via the Net Pay arrangement. But then again I suppose people who earn under the personal allowance are disadvantaged if their workplace pension is paid under the net-pay arrangement. It's all swings and roundabouts I suppose. (For me personally my SIPP is very small in any case compared to my workplace pension - Scottish Teachers.)

PS AS a Scottish tax payer who was until recently not, but may now be depending on my recent wage increase, a "higher rate tax-payer" I can claim tax (above 20%) back on SIPP and charity contributions due to being within the 21% rate (albeit it is only 1% of the gross amount I receive but it is better in my pocket than HMRCs and, in any case I am OCD when it comes to tax so like everything to be correct). I have managed to achieve this every year since 2018-19 when the new Scottish bands were introduced but what a hassle it can be trying to communicate with HMRC (I don't fill in a tax return). (I'm not debating whether the Scottish bands are a good or bad thing politically, just that they make HMRC communications a minefield.)