SIPP / Pension tax relief confusion

[thought]

Hi,

Can someone help me understand the numbers please, I have used online calculators and looked at all the threads I can find through search but can’t find a definitive answer. I have spent hours and hours at this and it just keeps confusing me. After reading through different posts on this topic, I get to some sort of understanding and then I read some more and get confused and lost again. I know it might be a simple topic for a number of you and you might be tempted to send me a google link, but please don't. I have anxiety and while I am good at what I do, I have trouble understanding some topics / concepts and this happens to be one of them. If you can help, please do. If you can't, please be kind. I just can't comprehend the numbers which is why I am asking this question here.


I am a contractor and have been working on an inside IR35 contract, paid via an umbrella company.

This year, my latest payslip, under Year To Date shows the following (I have one more payslip pending this year).
.

Salary Details:
	Gross for Tax & NI	Tax Paid	Employees NIC
Year To Date	125,197.65	37,990.40	4,909.02

.
It is almost the end of the year and I have made no pension contributions this year. I didn’t maximise my pension pot last year either and I believe I have a pension allowance just upwards of £53k this year. What I am trying to understand is how taxation works and how much should I add to a new SIPP account from my personal bank account today.

Should I add £40k? Would the HMRC/Govt. contribute anything more to the pension pot?

My understanding is that if I make a pension contribution of £40,000 to my new SIPP account I will receive a tax relief of £16,000 from HMRC. Would my SIPP balance show an account of £56,000 or does that contribution come back to my personal account?

if the calculation above is correct and it all gets added to the SIPP account, should I contribute less than £40,000 since £56000 is more than what I am allowed to contribute to pension this year or is it okay if I contribute £40000 and the Govt. adds £16000? Is my pension limit set on what I directly contribute or the balance of my account after tax relief?

I am unsure about my calculations above, is my understanding of the tax relief correct?

The other question that I can't find an answer to is what is the optimum amount of money to put in the SIPP? My payroll provider would have calculated higher NI and taxes since I am making over £100k? Should I aim to make less than £100k by putting the money I make above £100k in the SIPP?

Apologies for lots of questions and as I added above, please be kind with your responses, thank you for reading and I hope you have a great day.

[gixxer2021]

Hi, I’m sure someone with more knowledge than me will come along and help in a bit, but here’s my thoughts. If you’re working through an umbrella you’re much better off getting your pension paid as salary sacrifice, so you’re not paying any employers NI. It sounds like you’re wanting to make an employee pension contribution which won’t be as tax efficient.

You’re allowed up to 40k a year in employer’s contributions I believe, and if you’ve not used that allowance then you can use up to three years of unused allowance (so 120k if you’ve not paid anything into a pension the last three years).

Does your umbrella allow salary sacrifice SIPP payments? If so I’d probably be thinking about setting that up, and then using any unused allowance next year as salary sacrifice. This is all assuming that your contract will continue for a while. This is just my thoughts though and may not be the best approach, so hopefully others can offer more advice.

[thought]

Hi, I’m sure someone with more knowledge than me will come along and help in a bit, but here’s my thoughts. If you’re working through an umbrella you’re much better off getting your pension paid as salary sacrifice, so you’re not paying any employers NI. It sounds like you’re wanting to make an employee pension contribution which won’t be as tax efficient.

Thank you, that is my understanding too. My employer, the umbrella company, wanted me to fill a form every time a contribution was due. I called them a number of times but never managed to speak with someone who could guide me clearly about how the process would work and ended up just running out of time to get it done through them. Will try again in April

You’re allowed up to 40k a year in employer’s contributions I believe, and if you’ve not used that allowance then you can use up to three years of unused allowance (so 120k if you’ve not paid anything into a pension the last three years).

Indeed, I previously used to be employed and my employer used to pay into the pension, which means I only (as per my calculations) have an allowance just above £53k this year

Does your umbrella allow salary sacrifice SIPP payments? If so I’d probably be thinking about setting that up, and then using any unused allowance next year as salary sacrifice. This is all assuming that your contract will continue for a while. This is just my thoughts though and may not be the best approach, so hopefully others can offer more advice.

They do and I will reach out to them again in April. Thank you again for your response.

[eazy]

For 2022/23 the Annual allowance is 40K - My understanding is that this a gross payment i.e. tax rebate is part of 40K which is paid into your SIPP account

[Fred Bloggs]

For 2022/23 the Annual allowance is 40K - My understanding is that this a gross payment i.e. tax rebate is part of 40K which is paid into your SIPP account

That's right. Except if it's a limited company director's contribution that attracts corporation tax relief, then it's £40000 as there's no tax reclaimed.

[Aeia]

I've just engaged with a Financial Advisor and he advised me what I had left from last year so I can maximise my contribution as I'd inherited some money. So I bunged that across into my pension before the end of year, I will then need to fill in a self assessment form and from that they will pay back any tax relief owed into the pension.

This year (as I'm close to retirement and have this backup fund) I'll likely pay up to my limit through salary sacrifice through the Umbrella company (once my advisor has selected a SIPP as my current pension was a company pension but getting the money into that quickly means it can be transferred into a SIPP). I can also use up some previous years allowances (can't remember exactly what you can do or how much but the advisor will work this out)

If like me you struggle to get your head around it it's worth engaging with an advisor.

[Protagoras]

I've just engaged with a Financial Advisor and he advised me what I had left from last year so I can maximise my contribution as I'd inherited some money. So I bunged that across into my pension before the end of year, I will then need to fill in a self assessment form and from that they will pay back any tax relief owed into the pension.

I've never invested inherited money in a pension scheme because it seemed more sensible to put this in ISAs retaining the tax-free status and not risking future changes to tax that may impact pension income.

In general terms what is the advantage of putting inherited money (tax free) into a pension scheme (then taxable)?

[Fred Bloggs]

I've just engaged with a Financial Advisor and he advised me what I had left from last year so I can maximise my contribution as I'd inherited some money. So I bunged that across into my pension before the end of year, I will then need to fill in a self assessment form and from that they will pay back any tax relief owed into the pension.

This year (as I'm close to retirement and have this backup fund) I'll likely pay up to my limit through salary sacrifice through the Umbrella company (once my advisor has selected a SIPP as my current pension was a company pension but getting the money into that quickly means it can be transferred into a SIPP). I can also use up some previous years allowances (can't remember exactly what you can do or how much but the advisor will work this out)

If like me you struggle to get your head around it it's worth engaging with an advisor.

Not quite. The pension scheme reclaims basic rate tax on personal contributions. If you have higher rate tax liability then your tax code will be adjusted for the following year to reflect the higher marginal tax rate.

[Fred Bloggs]

I've never invested inherited money in a pension scheme because it seemed more sensible to put this in ISAs retaining the tax-free status and not risking future changes to tax that may impact pension income.

In general terms what is the advantage of putting inherited money (tax free) into a pension scheme (then taxable)?

As long as you have enough earned income to cover the personal payment criteria into a pension, it's fine.

Swings and roundabouts, ISA money is taxed on the way in, pension money is taxed on the way out. Each person's attitude is different. Generally I would say if you are a higher rate tax payer today but a basic rate tax payer in retirement then a pension contribution is better. Otherwise I think an ISA contribution is probably worthwhile.

[Protagoras]

Swings and roundabouts, ISA money is taxed on the way in, pension money is taxed on the way out.

I get this for tax paid income, but inheritance income is free of tax so the ISA money has not been taxed on the way in ...