tonyreptiles wrote:vrdiver wrote:Is there any way to drive earnings into the 40% bracket for one of you each year and then contribute to the SIPP to avoid paying 40% in tax?
If you are going to be in the position of not paying income tax at all, then a SIPP will let you pay in £2880 per year and HMG will still give you a tax rebate of £720, so having a SIPP set up and ready to take advantage of that might also be worth pondering.
VRD
Hi VR
That sounds interesting and has not been on my radar to consider - largely because I don't think I understand how that might work.
Can you explain it?
TIA
TR
Two different points. The second, HMRC giving you £720pa is straightforward. If you paid £2880 into a SIPP, your SIPP provider will reclaim £720 tax back and credit it to your SIPP account. Even if you don't actually pay tax, you still get the £720. There was a similar discussion on this
hereThe first point, re pushing annual income to over the 40% threshold is a bit more "creative". If you are able to control when earnings come in, you could, for example, push Jan/Feb/Mar earnings into April, thus having the current year a very "poor" year, but next year a very good year, or if you work with your partner and normally divide income from joint projects, but could instead allocate all or most to just one, again with the objective of pushing the annual earnings into the HRT bracket, you would then contribute to the SIPP all net earnings in excess of the BRT limit (e.g. earn £1,000 over the limit, pay in £800. Your SIPP provider will reclaim £200 and you would reclaim the other £200 via your self assessment. Result, £1,000 in your SIPP for £600 loss of net income. When you come to withdraw, 25% is (currently) tax-free, so £250 tax-free and £750 at 20% tax yielding £600 taxed as a BRT payer; result is £800 from your SIPP on the way out, from £600 on the way in, assuming you had used your personal allowance elsewhere, otherwise you'd obviously not pay some or all of the £200 tax on the withdrawal. (I've ignored investment outcomes, as I assume they would be the same inside or outsode of a SIPP, but
if you are paying less tax via the SIPP method, then you would also benefit from growth on your investments.
The above example assumes you are able to control the flow of earnings, which is usually hard for employees, but possible for those working for themselves. It's something you might want to talk to your accountant about if it looks like it might be of interest. The other thing to note is the tax benefits would need to offset any SIPP fees, so probably not worth the hassle for a £1,000 annual payment, but it gets interesting if you can pay larger lump sums in...
VRD