Starting a SIPP

[swill453]

Novice question, but I’m perplexed. The rules are that someone can put 100% of their annual income into a SIPP.
Imagine that’s £25k. The SIPP is then automatically “topped up” by 20%. What, on all of it? Because they’ve only been taxed on £25k-personal allowance; circa £25k-£11k = £14k, i.e. £2.8k tax paid…

perhaps best asked in pensions practical problems, but this thread came up on a search.

My understanding is yes. (That's what happened on my tax returns anyway)
If you have no earnings at all you can pay in (I think £2,800) and get the 20% relief on that despite having paid no tax.

You will only get the tax credit up to age 75. Under that age though you can pay in £2,800 and get the 20% tax added, so an additional £700. (an equivalent £3,500 gross)

You pay in £2880, and it gets made up to £3600 gross. However if your ultimate drawdown is taxed at the basic rate then you only benefit by the tax saved on the 25% tax-free part, so 20% of £900 = £180.

Still worth doing for a few minutes admin per year though.

Scott.

[Dod101]

Novice question, but I’m perplexed. The rules are that someone can put 100% of their annual income into a SIPP.
Imagine that’s £25k. The SIPP is then automatically “topped up” by 20%. What, on all of it? Because they’ve only been taxed on £25k-personal allowance; circa £25k-£11k = £14k, i.e. £2.8k tax paid…

perhaps best asked in pensions practical problems, but this thread came up on a search.

My understanding is yes. (That's what happened on my tax returns anyway)
If you have no earnings at all you can pay in (I think £2,800) and get the 20% relief on that despite having paid no tax.

You will only get the tax credit up to age 75. Under that age though you can pay in £2,800 and get the 20% tax added, so an additional £700. (an equivalent £3,500 gross)

You pay in £2880, and it gets made up to £3600 gross. However if your ultimate drawdown is taxed at the basic rate then you only benefit by the tax saved on the 25% tax-free part, so 20% of £900 = £180.

Still worth doing for a few minutes admin per year though.

Scott.

OK. The main point is though that you can only get the tax credit up to age 75.

Dod

[DrFfybes]

You pay in £2880, and it gets made up to £3600 gross. However if your ultimate drawdown is taxed at the basic rate then you only benefit by the tax saved on the 25% tax-free part, so 20% of £900 = £180.

Still worth doing for a few minutes admin per year though.

Scott.

Plus any growth/income within the SIPP is untaxed.

Also if (as it appears) Chris lives fairly frugally, he could take up to his personal allowance each year from a pension tax free plus a lump sum (total roughly £16750 ), and top his income up from ISAs (zero tax) or Divis (8.75%? tax). Delaying SP and then that gets better if he has SIPP left.

Although this is letting the tax tail wag the dog.

Paul

[swill453]

[
You pay in £2880, and it gets made up to £3600 gross. However if your ultimate drawdown is taxed at the basic rate then you only benefit by the tax saved on the 25% tax-free part, so 20% of £900 = £180.

Still worth doing for a few minutes admin per year though.

Plus any growth/income within the SIPP is untaxed.

That doesn't give any advantage, if you compare it with investing, say, in an ISA.

For example:

SIPP: £3600 invested, 50% growth = £5400, 20% tax on withdrawal gives net £4320

ISA: £2880 invested, 50% growth gives the same net £4320

The only advantage is the tax-free cash.

Scott.

[DrFfybes]

Plus any growth/income within the SIPP is untaxed.

That doesn't give any advantage, if you compare it with investing, say, in an ISA.

For example:

SIPP: £3600 invested, 50% growth = £5400, 20% tax on withdrawal gives net £4320

ISA: £2880 invested, 50% growth gives the same net £4320

The only advantage is the tax-free cash.

Scott.

I was comparing it with unsheltered, however...

SIPP: £3600 invested, 50% growth = £5400, 25% TFLS = £1350, leaves £4050, less tax gives £3240, so £4590 net. £270 more.

Unless I'm missing something?

[GrahamPlatt]

Plus any growth/income within the SIPP is untaxed.

That doesn't give any advantage, if you compare it with investing, say, in an ISA.

For example:

SIPP: £3600 invested, 50% growth = £5400, 20% tax on withdrawal gives net £4320

ISA: £2880 invested, 50% growth gives the same net £4320

The only advantage is the tax-free cash.

Scott.

I was comparing it with unsheltered, however...

SIPP: £3600 invested, 50% growth = £5400, 25% TFLS = £1350, leaves £4050, less tax gives £3240, so £4590 net. £270 more.

Unless I'm missing something?

Yes. With a SIPP it’s £2880 invested at the outset. Then you’re handed the difference to make it £3600.

[swill453]

Plus any growth/income within the SIPP is untaxed.

That doesn't give any advantage, if you compare it with investing, say, in an ISA.

For example:

SIPP: £3600 invested, 50% growth = £5400, 20% tax on withdrawal gives net £4320

ISA: £2880 invested, 50% growth gives the same net £4320

The only advantage is the tax-free cash.

I was comparing it with unsheltered, however...

SIPP: £3600 invested, 50% growth = £5400, 25% TFLS = £1350, leaves £4050, less tax gives £3240, so £4590 net. £270 more.

Which is exactly the tax saved on the TFLS. Like I said, the only (monetary) benefit of putting it in the SIPP, if the drawdown is taxed.

Scott.