Author Topic: How much can a marginal basic rate taxpayer contribute to a SIPP?  (Read 1247 times)

TartanTallulah

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My husband has a part-time, low-wage job and doesn't earn enough to pay tax. I've established that he can get tax relief on the same level of pension contribution as someone who doesn't earn anything at all, not on his entire untaxed income. That's reasonably clear (though there is contradictory information out there on the internet) and makes sense to me.

But what if - and this could happen - in the current year his income rises to just over the threshold for basic rate tax, let's say 12,000, so he's paying tax on 500. And he has a spouse who earns enough to cover all their outgoings, so the entire 12,000 is available for investment. Could he put 9,600 into a SIPP and get 2,400 in tax relief when he'll only be paying 100 in income tax plus a small amount of National Insurance?

Or is this a case of, "If it sounds too good to be true ... ?"



Rightflyer

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Re: How much can a marginal basic rate taxpayer contribute to a SIPP?
« Reply #1 on: July 30, 2017, 05:41:25 AM »
Caveat: Just trying to sort through this ourselves. Not experts by any means.

I think you are right. (Just NI would be due... as I read it.)
You can contribute up to the total amount of your earnings.

Other's who know better than I should step in here.




cerat0n1a

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Re: How much can a marginal basic rate taxpayer contribute to a SIPP?
« Reply #2 on: July 30, 2017, 12:55:55 PM »
Doesn't matter whether he earns enough to pay income tax or not. He can contribute up to 100% of his earnings into a pension (taking into account any employer contributions) and receive basic rate tax relief, provided he hasn't already started taking money out of a pension.

See e.g.
https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/tax-relief-and-contributions

https://www.moneyadviceservice.org.uk/en/articles/tax-relief-on-pension-contributions

poppydog

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Re: How much can a marginal basic rate taxpayer contribute to a SIPP?
« Reply #3 on: July 31, 2017, 03:59:32 AM »
Doesn't matter whether he earns enough to pay income tax or not. He can contribute up to 100% of his earnings into a pension (taking into account any employer contributions) and receive basic rate tax relief, provided he hasn't already started taking money out of a pension.

See e.g.
https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/tax-relief-and-contributions

https://www.moneyadviceservice.org.uk/en/articles/tax-relief-on-pension-contributions

That's correct, but I'd like to add that you can take the cash free lump sum out of a SIPP and still continue to contribute up to the earnings or annual limit.  Once you drawdown any of the remainder of the capital, you're limited to 4,000 p.a.

RobFIRE

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Re: How much can a marginal basic rate taxpayer contribute to a SIPP?
« Reply #4 on: July 31, 2017, 06:25:33 AM »
To be clear, you can contribute > 100% of earnings up to the Annual Allowance (currently 40,000 a year), but you can't get tax relief on that portion above your earnings. However, I doubt anybody would want to contribute > 100% of earnings to a pension as the up-front tax relief is the obvious appeal.

The more common scenario, as already covered, is that your earnings are below personal allowance (11,000 or so) and though you don't pay tax the earnings are taxable so when put in a pension the government gives you 25% extra as though you would have paid 20% tax on it (100 at 20% tax is 80 so the 20 tax top up is 25% of 80).

If you have started taking money out of your pension, you also can't get tax relief on the amount of that income by paying it back into your pension (government anticipated and closed that potential loophole of taking money out and putting straight back in for a 25% boost).

TartanTallulah

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Re: How much can a marginal basic rate taxpayer contribute to a SIPP?
« Reply #5 on: July 31, 2017, 10:08:36 AM »
Interesting! So let me get this clear ... if someone earns, say, 8,000 a year, they could get tax relief on up to 6,400?

I would like that to be the case.



poppydog

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Re: How much can a marginal basic rate taxpayer contribute to a SIPP?
« Reply #6 on: July 31, 2017, 10:21:36 AM »
Interesting! So let me get this clear ... if someone earns, say, 8,000 a year, they could get tax relief on up to 6,400?

I would like that to be the case.

Yes, I'm pretty sure that's correct.