Question - Paying into a pension and also taking a pension
Discussion
In brief.
I take a final salary pension from a previous employer, but I am still self-employed.
I would like to reduce my tax liability on my self-employment. Can I simply put some money into a SIPP (by 5th April this year, and then following years) and thus not have to pay tax on that money until I draw it out of the SIPP (in what would be around 8-9 years' time when I give up self employment).
I get that I'd then have to pay income tax when I take money from the SIPP, but paying tax on the money later rather than sooner is appealing.
Cheers.
I take a final salary pension from a previous employer, but I am still self-employed.
I would like to reduce my tax liability on my self-employment. Can I simply put some money into a SIPP (by 5th April this year, and then following years) and thus not have to pay tax on that money until I draw it out of the SIPP (in what would be around 8-9 years' time when I give up self employment).
I get that I'd then have to pay income tax when I take money from the SIPP, but paying tax on the money later rather than sooner is appealing.
Cheers.
Sorry to add another question, but I am a bit confused about the tax relief.
Looking at an HL SIPP it says that if I invest £10k (for example) the fund will be boosted by £2k within 6-8 weeks when they claim tax relief on my behalf. This feels like I'm getting tax relief twice, as when I submit my tax return for 2023-24 it will ask about any money put into a SIPP (as was the original point of the thread) and reduce my tax liability accordingly.
Help much appreciated, as whilst I realise I've still got a couple of days, and the SIPP only takes a few minutes to open, I would like to understand things a little better.
Cheers all.
Looking at an HL SIPP it says that if I invest £10k (for example) the fund will be boosted by £2k within 6-8 weeks when they claim tax relief on my behalf. This feels like I'm getting tax relief twice, as when I submit my tax return for 2023-24 it will ask about any money put into a SIPP (as was the original point of the thread) and reduce my tax liability accordingly.
Help much appreciated, as whilst I realise I've still got a couple of days, and the SIPP only takes a few minutes to open, I would like to understand things a little better.
Cheers all.
HL reclaim the 20% tax relief for you from HMRC, your tax return tells HMRC how much you;ve earned in total an paid in pension contributions, if your total taxable pay is high enough to stick you into the 40% tax bracket then HMRC will refund you the additional 20% directly.
Cheers
Jim
Cheers
Jim
Happy Jim said:
HL reclaim the 20% tax relief for you from HMRC, your tax return tells HMRC how much you;ve earned in total an paid in pension contributions, if your total taxable pay is high enough to stick you into the 40% tax bracket then HMRC will refund you the additional 20% directly.
Cheers
Jim
Thanks, I am being a bit thick, but I still don't understand. Let's forget about 40% tax though.Cheers
Jim
If I put £10k of my self-employed profit into a SIPP today, that will be noted on my tax return for 2023-24 and will save me paying £2k in income tax by 31st Jan next year.
HL will add £2k to that, claimed from the tax man, so I will have £12k in my SIPP.
I know that I will pay income tax on the SIPP money when I withdraw it in 8-9 years time, but that still seems like I've benefitted twice from the tax relief.
I have no doubt that you are correct, but I can't get my head around this.
Two things:
1. If you pay in £10,000 to HL they will claim £2,500 from HMRC and add this to your account (not £2,000).
2. As HL is a 'Relief at Source' arrangement you will put it on your tax return as a gross contribution of £12,500 (so HMRC will know HL have already claimed the 20% for you) and HMRC will then only give you credit for any higher rate tax relief you are due. You do not get basic rate tax relief twice.
1. If you pay in £10,000 to HL they will claim £2,500 from HMRC and add this to your account (not £2,000).
2. As HL is a 'Relief at Source' arrangement you will put it on your tax return as a gross contribution of £12,500 (so HMRC will know HL have already claimed the 20% for you) and HMRC will then only give you credit for any higher rate tax relief you are due. You do not get basic rate tax relief twice.
OddCat said:
Two things:
1. If you pay in £10,000 to HL they will claim £2,500 from HMRC and add this to your account (not £2,000).
2. As HL is a 'Relief at Source' arrangement you will put it on your tax return as a gross contribution of £12,500 (so HMRC will know HL have already claimed the 20% for you) and HMRC will then only give you credit for any higher rate tax relief you are due. You do not get basic rate tax relief twice.
Thank you. So the £10k contribution I make reduces my tax liability for 2023-24 by £2k, but when I draw money out in 8-9 years I'm paying tax on £12.5k. Have I got that right?1. If you pay in £10,000 to HL they will claim £2,500 from HMRC and add this to your account (not £2,000).
2. As HL is a 'Relief at Source' arrangement you will put it on your tax return as a gross contribution of £12,500 (so HMRC will know HL have already claimed the 20% for you) and HMRC will then only give you credit for any higher rate tax relief you are due. You do not get basic rate tax relief twice.
Turtle Shed said:
Thank you. So the £10k contribution I make reduces my tax liability for 2023-24 by £2k, but when I draw money out in 8-9 years I'm paying tax on £12.5k. Have I got that right?
I should stress that I don't know how these things work for self-employed people, but if you're a 20% tax payer, you're not going to get both a rebate to your SIPP provider AND a reduction in your tax liability. For PAYE folks, the rebate gives them back the tax they've already paid. They don't get the rebate again when they do a self assessment, unless they are higher rate tax payers.
Sheepshanks said:
Turtle Shed said:
Thank you. So the £10k contribution I make reduces my tax liability for 2023-24 by £2k, but when I draw money out in 8-9 years I'm paying tax on £12.5k. Have I got that right?
I should stress that I don't know how these things work for self-employed people, but if you're a 20% tax payer, you're not going to get both a rebate to your SIPP provider AND a reduction in your tax liability. For PAYE folks, the rebate gives them back the tax they've already paid. They don't get the rebate again when they do a self assessment, unless they are higher rate tax payers.
So my query was whether putting £10k (for example) into a SIPP before the end of this tax year, means that I don't have to pay income tax on that £10k, thus reducing my tax bill by 20% of £10k = £2k.
I know that when I draw down from that pension in perhaps 8-9 years I will then have to pay income tax on the money. Effectively just delaying the tax payment.
It all seemed simple until I began the process with HL and realised that I would get £2,500 added by the tax man, hence my subsequent confusion.
Let’s simplify this.
If your self employed profits were £22,570 you would have to pay £2k of income tax.
£2k being 20% of the £10k you made above your personal allowance.
If you also put £8k into your SIPP, the scheme would claim £2k from HMRC on your behalf.
You have therefore PAID £2k of income tax but you have also RECEIVED £2k of tax relief but this has been added to your SIPP.
If your trading profits were £60,570 and you had paid in the same £8k, you would declare the £10k of ‘Pension Input’ on your tax return so in addition to the £2k of ‘tax relief’ that has been added to your SIPP, you would not have any tax to pay at 40% because the last £10k of income will now be taxed at 20%.
This is also a form of ‘tax relief’ as you will have less tax to pay compared to what would have been the case had you not made that £8k(£10k) pension input and the £10k sitting in your SIPP has only cost you the £8k that you put in MINUS the £2k worth of “40%” tax that you didn’t have to pay.
Ergo, it has cost someone who might have otherwise paid £2k of 40% tax just £6k net to add £10k to their pension.
Now THAT’s (pension tax relief) Numberwang!
If your self employed profits were £22,570 you would have to pay £2k of income tax.
£2k being 20% of the £10k you made above your personal allowance.
If you also put £8k into your SIPP, the scheme would claim £2k from HMRC on your behalf.
You have therefore PAID £2k of income tax but you have also RECEIVED £2k of tax relief but this has been added to your SIPP.
If your trading profits were £60,570 and you had paid in the same £8k, you would declare the £10k of ‘Pension Input’ on your tax return so in addition to the £2k of ‘tax relief’ that has been added to your SIPP, you would not have any tax to pay at 40% because the last £10k of income will now be taxed at 20%.
This is also a form of ‘tax relief’ as you will have less tax to pay compared to what would have been the case had you not made that £8k(£10k) pension input and the £10k sitting in your SIPP has only cost you the £8k that you put in MINUS the £2k worth of “40%” tax that you didn’t have to pay.
Ergo, it has cost someone who might have otherwise paid £2k of 40% tax just £6k net to add £10k to their pension.
Now THAT’s (pension tax relief) Numberwang!
Edited by Mogul on Wednesday 3rd April 15:34
I understand the first bit of the above, the bit where we hit 40% tax is by no means simple, but not relevant to me.
So back to the original question then if nobody minds:
If I pay £10k into a SIPP in this financial year, will the tax man want £2k less income tax from me? I suspect the answer is "No, but you do get £2,500 added to your SIPP pot".
So back to the original question then if nobody minds:
If I pay £10k into a SIPP in this financial year, will the tax man want £2k less income tax from me? I suspect the answer is "No, but you do get £2,500 added to your SIPP pot".
Mogul said:
Bingo!
the answer is "No, but you do get £2,500 added to your SIPP pot".
.....other than the fact that he will pay £2,500 in tax and a corresponding £2,500 will be added to his pension. It is not £2,000 and £2,500.the answer is "No, but you do get £2,500 added to your SIPP pot".
He declares £12,500 taxable income. He pays £2,500 tax. He puts a NET £10,000 into a pension which is then grossed up to £12,500 by a £2,500 contribution from HMRC claimed for him by the pension provider.
Basically his £12,500 of taxable income is effectively tax free because the £2,500 tax he pays is diverted back to his pension by HMRC.
If the OP were a higher rate taxpayer, he would put the gross contribution of £12,500 on his tax return in the "pension contributions on a Relief at Source basis" box and then receive a further £2,500 higher rate tax relief (which HMRC would literally pay to him). He would then have made a £12,500 gross pension contribution that would have really cost him £7,500* after the HMRC contribution and refund (both £2,500) were taken into account.
- Edited to add. If your net cost is £7,500 and £12,500 ended up in your pension that is a difference of £5,000 which is the full 40% tax relief.
Edited by OddCat on Saturday 6th April 14:20
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