Using SIPP to offset tax and child benefit?

[oyster]

I am planning to make a lump sum pension contribution this fiscal year to get me down to basic rate tax level.
Can I also offset the child benefit restrictions as well?

E.g. If I earned £100k and put £60k into a pension, it would take me down into the basic rate, hence earning a nice tax rebate. As this takes me below the £50/£60k limits for child benefit, would it make me eligible again to claim CB?

Also can I just pay cash into the SIPP by year end to use this offset, or do I need to have made investments within the SIPP?

[Eric Mc]

There are upper limits as to how much you can put into personal pensions.

[walm]

I am sure Eric will be along shortly in a moment but in the meantime I was under the impression the following was true...
- No you can't get back under the CB threshold.
- Pension contributions are limited to £50k allowance (for getting tax back - you can put more than £50k in but you don't get any tax relief beyond £50k).
- According to the FAQs on the HL SIPP you can leave the investment as cash for as long as you like and I don't think the government care whether or not it is invested just as long as it is formally in the SIPP wrapper.

[walm]

Actually sorry - I may be completely wrong about CB: http://www.telegraph.co.uk/finance/personalfinance...

[PurpleMoonlight]

You can make a contribution in excess of £50,000 by bringing forward unused allowance from the three previous tax years. Tax relief will only apply in the tax year of payment though.

[sumo69]

Max annual contribution is now £40k gross - 3 year unused contributions can increase the amount permitted to be paid onto the SIPP but the tax relief on contribution is limited to the annual limit I believe.

Remember that the years to review the pension may not be the same as a tax year.

David

[Cheib]

Over and above your own allowance you can also contribute to a pension for your kids....you only get basic rate relief and you can only put £3000 in or so. Still it's worth doing if you can afford it.

[New POD]

Given that you can get pension draw back at aged 54, this is an excellent way of saving money.

In fact depending on your financial circumstances I might suggest thinking at the following loop hole.

Do you have kids about to go to university?

If you earn less than £25K they get a full maintenance grant. Due to the unique ways some universities dole out their bursaries, if the kid gets a full grant, they might give them free money.

So ask yourself "How do I live on £25K for 4 years". 1) you take the money you saved to help the kids through university, and use it to pay the interest on the mortgage, or you pay off the mortgage if it's small enough. 2) You max out credit cards. 3) You demand that the child loans you his bursary to help pay the mortgage.

How do you reduce salary to £25K ? SIPP ?

Think about this. If you earn say £35k a year you see about what proportion of the £10K ? about £6.5K?
Grant is what £3K, Bursary could be £1.5K so that's £4.5K FREE money for £10K invested in pension.
Now lets say you take 25% out at 54, and your £10K doubles, (Okay you could screw up and loose it all but humour me) so that 10K is going to be worth £20K and you can have 25% back tax free. Call that £5K.

So by investing £6.5K now, you get £4.5K free now, and £5K in the future, and you still have £15K in your pension.

Of course there are other scenarios, and the HMRC could change the rules, and different universities have different bursaries, investments go down as well as up, but IF your pension needs more money in it, and if you can afford to live on £25K for a while, then it's all good really.

Eric will probably tell me I'm a star later.

[oyster]

Thanks for all the replies.

So working through an example:
If I was paid £60k with 1 child and I made a £10k payment into a pension, I would be due a tax rebate of £4k plus be able to keep £1,055 of CB. So a net tax offset of over 50%.

Presumably I would receive the £4k tax rebate in the form of a payment to my bank account?


And what about share dividend income - is this included in the £50k/£60k thresholds for child benefit?

[Eric Mc]

Dividend income is included in any assessment for Child Benefit purposes - as is interest received, rental income etc.

[Kudos]

Eric Mc said:

Dividend income is included in any assessment for Child Benefit purposes - as is interest received, rental income etc.

st.

[Eric Mc]

Why shouldn't it be, to be honest?

We can't have all these powerfully built dirctors claiming they are on minium wage when pocketing dividends in the tens of thousands.

[PurpleMoonlight]

oyster said:

So working through an example:
If I was paid £60k with 1 child and I made a £10k payment into a pension, I would be due a tax rebate of £4k plus be able to keep £1,055 of CB. So a net tax offset of over 50%.

Presumably I would receive the £4k tax rebate in the form of a payment to my bank account?

It depends how it's paid and what type of pension arrangement.

If it's a personal contribution to a personal pension, you would pay in £8,000, the pension provider would reclaim £2,000 (so £10,000 is in the personal pension) and you would then get back £2,000 in cash from HMRC following submission of your tax return.

[rotarymazda]

oyster said:

I am planning to make a lump sum pension contribution this fiscal year to get me down to basic rate tax level.
Can I also offset the child benefit restrictions as well?

I do this on a regular basis using salary sacrifice which also recovers the national insurance contribution for both employer and employee (13.8% and 2%). The lump sum at age 55 is tax-free and you don't pay N.I. on pension.

I did this after working out my total marginal tax rate was ~63%, even though I'm in the 40% band.

Regarding University maintenance grant, the effect of this is an extra 8% income tax for part of your income. You can use salary sacrifice to drop your income for the appropriate years. It just needs a bit of planning to pay off the mortgage and build up some savings to live off for those years. The rules take income into account rather than debt/savings.

Friends at Uni 25 years ago with Dads that had their own business were using these sort of tricks to get better grants. (lower income for a while, leave money in business, then pull out 3 years later).

I'm been offered evening contract work a few times but just say no, I just can't face paying ~2/3rd of the earnings to the taxman. Too much tax => I stop work.

Basically, I see all this as shifting my income around between years to minimise the overall tax/benefits bill.

[rotarymazda]

oyster said:

Thanks for all the replies.

So working through an example:
If I was paid £60k with 1 child and I made a £10k payment into a pension, I would be due a tax rebate of £4k plus be able to keep £1,055 of CB. So a net tax offset of over 50%.

Presumably I would receive the £4k tax rebate in the form of a payment to my bank account?


And what about share dividend income - is this included in the £50k/£60k thresholds for child benefit?

Don't forget the NI savings. Get your employer to make the pension contribution on your behalf and give you their N.I savings (£thousands!). It costs them nothing. The pension companies will have someone to do the calculations for them.

Then report back as to what your marginal tax rate really is. You will be surprised.

[New POD]

Eric Mc said:

Dividend income is included in any assessment for Child Benefit purposes - as is interest received, rental income etc.

Unless it's shares held in a SIPP, and then it's just part of the pension pot.