Tax Relief on SIPP Contributions
Tax relief is normally given on contributions to your SIPP.
If you are a basic rate tax payer or pay no income tax at all you will receive 20% from HMRC. For example if you contribute £80 then HMRC will add another £20 making £100 in total. If you are a higher rate tax payer (generally those earning above £43,875) then you might receive additional tax relief through your tax return - this can be up to 20% making a total of 40%.
If you are earning £60,000 pa and make a contribution to your SIPP of £8,000 pa then HMRC will add another £2,000 making £10,000 in total. Then through your tax return you can claim another £2,000 in tax.
It's worth noting that if you make a contribution which takes your taxable earnings below the higher rate tax threshold then the tax relief will be less than 40%. In effect you receive a blended rate which would be between 20% and 40%.
High Earners
For very high earners (those earning more than £150,000pa) the 22 April 2009 Budget made things more complicated.
From the 6 April 2011 income tax relief on pension contributions will be restricted for those earning in excess of £150,000pa or more. It will be tapered all the way down to 20% when income exceeds £180,000pa. In other words for those earning this amount, or more, tax relief will be restricted to the same rate as that which applies to the basic rate tax payer.
To prevent a two year rush by high earners to put monies into their pension before the 6 April 2011, Alistair Darling also announced a target of anti-forestalling measures.
- If your income in 2009/10 is less than £150,000pa and has been less than this in the previous two tax years then you will continue to receive higher rate relief at 40%.
- Normal regular (monthly or quarterly) pension saving arrangements can continue (and will receive higher rate tax relief where applicable) unaltered even if you are earning in excess of £150,000pa.
- Or, you can make what is called a "special annual allowance" of £20,000pa gross for the 2009/10 and 2010/2011 tax years and again receive higher rate tax relief.
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The last point led to a chorus of accusations of unfairness from the self employed who typically make one-off contributions. This led to a further amendment on 3 July:
- Those not making regular contributions (when point 2 would apply) can instead either pay the "special annual allowance" (£20,000pa) or invest the average of the last three years contributions or £30,000 whichever is the smaller amount.
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The link below shows how this works for different earning bands. For advice on working out your tax relief on your pension contributions please contact us on 020 7337 0520.
