SIPP tax relief, this can't be right!

[MisterA]

This can't be right, can it??

SIPP rules - you can pay 100% of your wages into a SIPP up to a maximum of £60k, or your full wage (whichever is smaller). The amount you can pay in includes the 25% tax relief.


An example of a low paid person:
In a single year.
Wages £20k (maybe part time hours?).
Total pension contributions into a SIPP, £16k.
Additional tax relief rebate is £4k
Total into the SIPP = £20k (100% of wages and so within the rules),

But!
Tax was only paid on £20k minus personal allowance of £12.5k, so £7.5k is taxable.
Tax paid is 20% of £7.5k, so £1.5k. Tax rebate is £4000!

The upshot of this is that wages were £20k minus £1.5k tax, so £18.5k.
£16k paid into the SIPP becomes £20k with the tax rebate.
So there is a net gain onto incomings of £2.5k, due to the tax rebate!

National Insurance wasn't factored in, but is this correct, and legal?

Somebody paying into a workplace pension wouldn't get this gain, as they simply wouldn't pay tax in the first place (due to the way tax/contributions are calculated/deducted).

The figures aren't right, but this situation is a real one.

[daverobev]

You can put £2880 in even if you have zero earnings, and the govt bumps that up to £3600.

Bear in mind it's taxable on the way out. If you're still a standard rate taxpayer when you take the money out, let's say it's doubled to 40k, ok you get 10k tax free but you're going to pay 6k of tax on that 30k.

Paying in via workplace is the same. If you can salary sacrifice it's even better. You can't leave yourself below min wage this way, though. But yeah you can contribute the max through sal sac then put the rest in to a SIPP if you want.

Pensions in the UK are really good, particularly for frugal people. BUT they are locked to State Pension age - 10 years (unless you're lucky and were in one that guaranteed 55 before the legal changes).

[Brit71]

My situation is similar - I've got ISA savings I want to funnel into my pension up to the maximum amount even though for some of that income I wasn't paying tax in any way - and I went to my then Financial Adviser and asked.  As it was a bit unusual she referred it on and confirmed that I could actually do this.

So yes, you can use income into your pension even when it's not taxed.

I did, and I went to the extent of getting it checked.

This "loophole" is rarely used I suspect.

[PhilB]

I too can confirm that it is definitely real.  We made full use of it for several years to put 100% of DW's part time earnings into a pension and get more tax relief than she paid tax.  Having retired early, she's now taking it all back out again tax free.  It is indeed a stupid rule, but I think Brit71 is probably right that not enough people exploit it to make it worth plugging, plus the individual amounts aren't huge.

People in a workplace pension don't necessarily miss out - it all comes down to how the scheme is set up.  If it's a net pay scheme, then you are right, but some employers operate a relief at source scheme instead which works similarly to a private pension ie the scheme claims the rebate from HMRC.

[MisterA]

We made full use of it for several years to put 100% of DW's part time earnings into a pension and get more tax relief than she paid tax.  Having retired early, she's now taking it all back out again tax free.

Thanks for the replies guys.

@PhilB - that's exactly what we're doing right now (paying in)! This will make full use of my Mrs £12.5k tax allowance, when otherwise she'd have no income coming in.

[Brit71]

I too can confirm that it is definitely real.  We made full use of it for several years to put 100% of DW's part time earnings into a pension and get more tax relief than she paid tax.  Having retired early, she's now taking it all back out again tax free.  It is indeed a stupid rule, but I think Brit71 is probably right that not enough people exploit it to make it worth plugging, plus the individual amounts aren't huge.

People in a workplace pension don't necessarily miss out - it all comes down to how the scheme is set up.  If it's a net pay scheme, then you are right, but some employers operate a relief at source scheme instead which works similarly to a private pension ie the scheme claims the rebate from HMRC.

Paying into a workplace pension will stop at the minimum wage, they can't pay you less.  However if there's a gap between that and £60,000 you can plug that with a payment to a SIPP.