Pension tax relief and maximising SIPP
Discussion
I'm wondering if someone more knowledgeable than I will indulge my dummy question. I'm pretty clueless on UK pension rules, as I haven't worked in the UK before - I emigrated in my early twenties.
I'm considering a U.K. position in the future with my current Hong Kong based employer.
I own a home outright in the U.K., married, no kids. As such, redicing my taxable salary to around the higher rate threshold of 46k would be ample. In order to minimise tax, I'd like to throw as much as I can into a SIPP. I wouldn't be paying NI due to being in an exempt category. No other income or employer contributions.
Using round numbers, how much can I put into a SIPP, and on top of that, how much relief can I get (and add it to the SIPP) each year? Then, what will my tax bill be? For ease, lets use 100k as a salary, as it's not far off. I'd be taxed via self assessment, not PAYE.
Can I contribute 40000 of my own money into the SIPP then get 40% relief added to that, to create a pot of 56k each year?
Using an easy 100k salary as an example, am I going wrong here?
Putting 40k of my salary into the SIPP leaves an adjusted salary of 60k and a pension pot of 56k after 40% relief.
Or, is the annual limit 40k inclusive of relief?
Coming from a low tax regime, the U.K. tax system is a little off-putting. However, if I can pay tax on an effective 60k, it's a lot more enticing, particularly if 56k is going into my own coffers for later life.
If I'm along the right lines, can someone explain the mechanics of doing it? I understand if I put 40k into the SIPP in March, HMRC add 20% to it. The other 20% will have to be claimed back by self assessment. Can I put this into the SIPP for the same year, or is it cash to be used in the following year? If so, I'd put it in an ISA so to have the full 40k contribution limit again.
Sorry if that's confusing. In short - what's the most tax efficient way to reduce my income by using pension provisions?
A worked example on 100k salary would be most helpful, with a pension accrual number and a taxable salary number.
If the numbers stack up, I would be keen to come back for a few years to take advantage of this, then return to HK to finish up.
Cheers all.
I'm considering a U.K. position in the future with my current Hong Kong based employer.
I own a home outright in the U.K., married, no kids. As such, redicing my taxable salary to around the higher rate threshold of 46k would be ample. In order to minimise tax, I'd like to throw as much as I can into a SIPP. I wouldn't be paying NI due to being in an exempt category. No other income or employer contributions.
Using round numbers, how much can I put into a SIPP, and on top of that, how much relief can I get (and add it to the SIPP) each year? Then, what will my tax bill be? For ease, lets use 100k as a salary, as it's not far off. I'd be taxed via self assessment, not PAYE.
Can I contribute 40000 of my own money into the SIPP then get 40% relief added to that, to create a pot of 56k each year?
Using an easy 100k salary as an example, am I going wrong here?
Putting 40k of my salary into the SIPP leaves an adjusted salary of 60k and a pension pot of 56k after 40% relief.
Or, is the annual limit 40k inclusive of relief?
Coming from a low tax regime, the U.K. tax system is a little off-putting. However, if I can pay tax on an effective 60k, it's a lot more enticing, particularly if 56k is going into my own coffers for later life.
If I'm along the right lines, can someone explain the mechanics of doing it? I understand if I put 40k into the SIPP in March, HMRC add 20% to it. The other 20% will have to be claimed back by self assessment. Can I put this into the SIPP for the same year, or is it cash to be used in the following year? If so, I'd put it in an ISA so to have the full 40k contribution limit again.
Sorry if that's confusing. In short - what's the most tax efficient way to reduce my income by using pension provisions?
A worked example on 100k salary would be most helpful, with a pension accrual number and a taxable salary number.
If the numbers stack up, I would be keen to come back for a few years to take advantage of this, then return to HK to finish up.
Cheers all.
Edited by Testaburger on Sunday 8th April 14:53
Thank you, PM.
When you say claim back, would that be essentially in the form of a cheque from HMRC? Or, would it be reducing my taxable salary by 20% of 32k?
I'm guessing you can't put that back into the SIPP for the same year..
If so, does this look about right for 100k salary..
32 into SIPP, leaving 68k taxable.
Further 8k deduction from higher rate relief leaving 60k taxable salary..
Sound sensible?
Apologies for being moronic with this.
Are there other tax efficient options to reduce my salary further?
When you say claim back, would that be essentially in the form of a cheque from HMRC? Or, would it be reducing my taxable salary by 20% of 32k?
I'm guessing you can't put that back into the SIPP for the same year..
If so, does this look about right for 100k salary..
32 into SIPP, leaving 68k taxable.
Further 8k deduction from higher rate relief leaving 60k taxable salary..
Sound sensible?
Apologies for being moronic with this.
Are there other tax efficient options to reduce my salary further?
Edited by Testaburger on Sunday 8th April 15:23
I assume you are referring to your higher rate tax relief.
As you are self employed you will not have paid the tax yet, as a PAYE employee would, so you just end up paying less to HMRC at the end of the tax year.
You can do what you like with your net income, so yes £20,000 into an ISA if you wish.
As you are self employed you will not have paid the tax yet, as a PAYE employee would, so you just end up paying less to HMRC at the end of the tax year.
You can do what you like with your net income, so yes £20,000 into an ISA if you wish.
PurpleMoonlight said:
I assume you are referring to your higher rate tax relief.
As you are self employed you will not have paid the tax yet, as a PAYE employee would, so you just end up paying less to HMRC at the end of the tax year.
You can do what you like with your net income, so yes £20,000 into an ISA if you wish.
I'm not self employed, but taxes filled via self assessment due overseas employer. As you are self employed you will not have paid the tax yet, as a PAYE employee would, so you just end up paying less to HMRC at the end of the tax year.
You can do what you like with your net income, so yes £20,000 into an ISA if you wish.
I think I'm with you. I'm essentially trying to figure out my tax position in basic terms, maximising pension contributions.
Essentially I can contribute 32k into a SIPP, and reduce my taxable gross by a further 8k, leaving a taxable salary of 60k.
Thank you again.
Testaburger said:
If so, does this look about right for 100k salary..
32 into SIPP, leaving 68k taxable.
Further 8k deduction from higher rate relief leaving 60k taxable salary..
Self employed is not my area of expertise but I think it works this way:32 into SIPP, leaving 68k taxable.
Further 8k deduction from higher rate relief leaving 60k taxable salary..
Profit £100,000
Less personal allowance: £12,000 (to keep it simple)
Taxable profit £88,000
Tax 20% x £34,000 (to keep it simple) = £6,800
Tax 40% x £54,000 (to keep it simple) = £21,600
Less higher relief on pension contribution 20% x £40,000 = £8.000
Tax to pay £6,800 + £21,600 - £8,000 = £20,400
Net income £100,000 - £20,400 - £32,000 = £47,600
SIPP £40,000
Edited because my maths was crap!
Edited by PurpleMoonlight on Sunday 8th April 15:48
Edited by PurpleMoonlight on Sunday 8th April 15:52
Yes, and it'll be at least 57 for me. I'm 34 so if I did this, it would be probably for 6-7 years to build a pot. Then I'd return to HK and add to my current pot which I'd bring back to the uk when I retire - ideally at 50.
HK is far more lucrative for me, but if I can keep most of my dosh from the taxman (albeit deferred to 57) living in the UK, I would certainly be keen for a while.
ETA thanks, you've been very helpful.
HK is far more lucrative for me, but if I can keep most of my dosh from the taxman (albeit deferred to 57) living in the UK, I would certainly be keen for a while.
ETA thanks, you've been very helpful.
richardxjr said:
I'm thinking of similar, but am older. Where should I start looking for a safe SIPP?
It seems most of the popular investment platforms offer SIPPs, with the notable exception (I believe) of Vanguard...From there, you can allocate a portfolio to suit your risk profile.
richardxjr said:
I'm thinking of similar, but am older. Where should I start looking for a safe SIPP?
All mainstream SIPPs are safe. It is the investments you hold within them that matter.SIPPs are all written under trust law, so your Scheme assets are ring-fenced from the SIPP provider (in the event they go pop).
In days of yore it was only insurance companies that offered pensions (that is to say collected basic rate tax relief at source from the Revenue and reported to them every year on your behalf, as that is all a pension is (a tax efficient 'wrapper' for your investments). You could, however, only invest in the insurance company's own funds (which were often shockingly bad - hence pensions getting a very bad name).
A SIPP ("Self Invested" Personal Pension) is no different to any other type of Personal Pension, other than you (or your financial adviser) have complete freedom as to what assets you select to invest this money in.
Complete freedom can be very good, and also very bad (if your adviser puts you in a non-standard asset).
In summary, SIPPs are not the problem (they are tax 'wrappers' just ilke an ISA), it is the investments you hold within that can be an issue.
Thank you. My existing Aviva pension isn't a SIPP but does allow you to choose from it's various funds at different risk levels and mix and match even. It seems to have performed pretty well and is easy for me or employer to make regular payments into it. So I'm inclined to stick with that.
richardxjr said:
Thank you. My existing Aviva pension isn't a SIPP but does allow you to choose from it's various funds at different risk levels and mix and match even. It seems to have performed pretty well and is easy for me or employer to make regular payments into it. So I'm inclined to stick with that.
I would stick with that then. Once you understand it is only a 'wrapper' and are happy with the investment choice's there is really no more to worry about. You are not going to have any problems with Aviva. Gassing Station | Finance | Top of Page | What's New | My Stuff