Tax code and pension

[deeb0]

Hello all

I am an IT day rate contractor and pay PAYE via an umbrella company (FYI: i've opted out of auto enrollment as the scheme looked rubbish and there's effectively no "employer" contribution at all, I'd be paying both sides of it).

HMRC have provided a tax code for the year of 387T. I think this means they have reduced my tax free allowance from £12,000 to £3,870.

I'm trying to figure out if I make payments, post tax, from my own bank account into a personal pension (SIPP - I have an existing one I've not contributed anything to in around 4 years) , and reclaim the additional 20% from HMRC, if this has any impact on (increasing) my personal tax allowance from £3,870?

Many thanks, I'm going round in circles trying to figure it out.

[Stay in Bed Instead]

Shouldn't the first question be why had your tax code been reduced?

Do you have other income?
Do you owe tax from previous years?

[deeb0]

Stay in Bed Instead said:

Shouldn't the first question be why had your tax code been reduced?

Do you have other income?
Do you owe tax from previous years?

Hi Stay in bed instead – fair question. I don’t have other income and I don’t owe tax from previous years. For context, for the last 4 tax years I’ve either entirely or in part been paid via a mix of PAYE and dividends via my own ltd company. Now I’m fully PAYE via umbrella, I’ve presumed HMRC think I will be paid >100k this year, and for every £2 you earn over £100k you lose £1 of tax free allowance.

If a certain set of circumstances turn out, then they will be correct – if I work more than around 42 weeks of the year, but as I’m not paid for time off / holidays and my contract could finish at any time [I won’t be paid and it'll take at least 3-4 months to get into another], I will inevitably won’t be paid as much as the tax code calculation thinks I will, across the whole tax year, if that makes sense.

I’d like however to mitigate against the scenario that I do end up in the personal allowance reduction zone, hence looking into making pension contributions , but given they would be paid post tax into a SIPP, per OP currently don’t understand if would this have a favourable impact on my personal allowance. If it does, I will contribute more into pension than I otherwise would have as it’s an obvious win.

thanks

[Stay in Bed Instead]

As far as I know a pension contribution will not affect the Tax Code being used in the year. Obviously if you have paid too much tax at the end of it you will get a refund when you file your tax return.

[JulianPH]

If you make a pension contribution from you own bank account this is treated in exactly the same way as the company making a gross pension contribution for you.

They will both lower your taxable earnings in the same way.

So if you earn £110,000 and make a £10,000 pension contribution your earning for tax (and personal allowance purposes) are £100,000.

To do this from taxed income you make a contribution of £8,000 which your pension/SIPP provider will reclaim £2,000 in basic rate tax relief and you claim a further £2,000 of higher rate tax relief back on your self assessment form.

It is obviously simpler if your company makes a gross contribution of £10,000 on your behalf, as this way your earning never went over the £100,000 threshold in the first place.

[deeb0]

Thanks both, incredibly helpful.

[Armitage.Shanks]

Without sidetracking this thread a question on Tax Code changes.

Last week I received ae email from HMRC (legit) informing me my tax code had changed and to log into my Gov Gateway account. I logged in and there is no indication I can see of my Tax Code change but I've now been given a log in access to 'Self Assessment'. There's no mention I am now on SA or to complete it so is this optional?

My tax code has fluctuated over the past few years based on part time income and any underpay has usually been collected from the following years tax code adjustment.

I'm PAYE, pensions and some part time work both taxed at appropriate rates. All my investments are in tax free wrappers.
So what gives?