Income tax?

[Jagzfan]

If I earned £50k a year, and paid £32k into a SIPP, does this mean that when I pay income tax, I'm only paying it on £16k (less than personal allowance). Or do I still get taxed on the full £50k anyway?

I know I would also get 20% relief on the £32k - effectively making it a £40k contribution to the SIPP

...I meant £18k..sorry!

I think if you're paying into your work pension scheme and it's salary sacrifice then yes you only pay income tax on £18k.

There are so many different types of occupational pension schemes. Net pay, simple salary sacrifice, SMART salary sacrifice and they all operate in different ways.

We have SMART salary sacrifice at work meaning I only pay tax and NI on what's left after my pension contribution is deducted. NI also goes into the pension.

SIPP provider claims back tax at 25% of what you pay in. So you pay in £80 and you get £100 going in.

If you have a salary of £50k gross, you could pay £32k to a SIPP, as £32k plus basic rate tax relief = £40k which is the max you can pay in without using Carry Forward.

If £50k is earned in employment, rather than self employment, then you would not be able to put £32k to SIPP as you would have pension contributions being deducted from your £50k by your employer. But assuming you are talking theoretically, then yes, you could pay £32k to a SIPP and get £8k in tax relief if you had a £50k salary.

Income tax would be on your £50k as unlikely that an employer would contribute to a SIPP via salary sacrifice, though not impossible.

So it really depends on what the setup is.

The govt will top up the contribution by £8k and will pay it directly into your SIPP account.

Assuming it’s not through salary sacrifice, you will pay the same amount of tax as you would without the pension contribution. If you were a higher rate taxpayer (income in excess of £50,270) then it would have reduced your liability.

The £8k that HMRC top up the contribution by IS the tax you've paid.

If you pay out of already taxed income, HMRC make the 20% top up. That's your tax relief.

If you are able to pay at source before your income in taxed, then you pay the £40k and don't get the top up. But they you don't pay the tax on the £40k.
If you can arrange this it is better, as both you and the empyer save the NI cost.

You don't get to have your cake and eat it 🙂

As a tax service, we can inform you that contributions made to a SIPP (Self-Invested Personal Pension) are eligible for tax relief. If you are a basic rate taxpayer, your contributions will be eligible for a 20% tax relief, so you would only need to contribute £32,000 to receive £40,000 in your SIPP. However, this does not reduce your overall taxable income for the year. You will still need to pay income tax on your full income of £50,000, but the pension contribution will lower your taxable income and could potentially lower your overall tax bill. It's important to consult with a tax professional or use tax software to calculate your exact tax liability in this situation.

Another point to add which has happened to me is that as well as only being able to put £60k pa into your pension including tax relief and employer contributions, if using salary sacrifice you can't end up earning
a salary which is below below minimum wage.

This is around £19kpa so if earning £50k you can effectively only sacrifice £30k of your salary. But not go over £50k in total. Even if you have carry forward allowances.