how to earn £1500+ per hour – claim back tax on your SIPP contributions
The headline may sound unbelievable, but it’s actually true, I did “earn” just over £3000 the other night simply by filling out my self assessed tax form to claim the tax back on my SIPP (Self Invested Personal Pension) contributions for the previous tax year – See the screen shot of my final pay out above to prove this!
I genuinely thought it would take me about a week of head scratching and article reading to get my head round all the complications, find the relevant documents and so on, but it was in fact surprisingly easy. In total I would say that it took me around 2 hours of actual form filling in (and next year this will be even quicker!) so that makes my effective hourly rate:
£1500/hour!!!!
Needless to say I think this is the highest hourly rate I have ever achieved for what could be considered “work” 1
If you have never done a tax return before I’ll take you through the whole process from start to finish in part two of this post, but first of all in part one let’s just talk about the wonderful thing that is the SIPP.
the great “British SIPP tax-break” off*
*Sorry, that was bad even for my standards!
SIPPs are bloody great. The main benefit is that you get tax relief automatically added when you stuff some money into it at the standard 20% rate, and if you are in a higher rate tax bracket then you can claim further relief via the self assessment tax form as we have discussed above. The total tax relief you will receive is therefore up to 45%!
Even better, the way this works is most probably slightly different from how you would imagine with your first back of the envelope calculation, an example best illustrates this:
Say I put in £8,000 2 – You might initially think that your tax break would be added by simply multiplying the £8k by 20% so you would get £1,600 added into your account. WRONG! They actually assume that your contribution is the part you wanted to put in after tax has already been taken off.
So in our example they will assume that if you were a 20% tax payer you actually wanted to put a total of X where X = £8k * (1 – 0.2) – in other words just divide you initial amount by 0.8 to get your “total contribution”. Maybe it’s easier to think about from the reverse perspective once you know your total amount after tax relief:
Total amount = £8K / 0.8 = £10,000
The reverse calculation: £10,000 * 20% = £2,000 – So now you can see why that is the amount that gets added to your initial £8k contribution 3
In other words the rule is:
If you are on 20% tax rate your initial contribution actually gets a boost of 25%!
If you are on a 40% tax rate this works out even better, and some of you may already be one step ahead of me here and thinking you just divide your £8k by 0.6 (1 – 0.4) to get your final contribution
Total amount = 8k / 0.6 = £13,333 – This means your own contribution is boosted by a whopping 66%
Not so fast, poindexter…. 🙂
Actually, in practice this is not quite the way it works. Don’t worry, you still get the 66% boost on your total money in as you would expect, but because for anything above the 20% you actually claim the tax back, rather than get the instant boost to the contribution, the figures are slightly different, just to make things more confusing for you.
So now what the government do is assume that the total contribution you wanted to make was in fact, in our example, the £10K amount that is in your account (after the initial 25% boost). They then work out what you are owed to get you back down to the correct amount of tax relief of 40% on that £10k contribution:
£10k total contributions * 40% = £4,000 of total tax relief to be given.
Total tax relief already given = £2,000 therefore the tax rebate you will receive is obviously just £4k – £2k = £2,000.
That was simply a long winded way of saying the rule is:
If you are on 40% tax rate you will receive a tax rebate equal to the amount the initial contribution gets boosted by!
As mentioned earlier you can now see that the total “boost” to the SIPP fund, in comparison to the amount you are actually out of pocket for (i.e. your net contribution) is, in our example:
Net contribution £6,000 / Total money in SIPP £10,000 = 66% boost 🙂
If you wanted to work out the 45% tax situation you should be able to do it yourself now or if not you can probably afford an IFA to do it for you 😉
So there you have it, the great SIPP tax break explained in some easy to follow(!?) examples!
If I’ve just confused the hell out of you, or you just wanted to play around with some values and see how much you could claim back, this calculator from HL is really great to see how the values of contributions and tax relief all work out.
woah there, newly anointed SIPP fans…
Before you plow all of your spare cash into a SIPP, there are a few fairly large downsides of a SIPP which we mustn’t forget:
- You can’t access any of the funds until you approach traditional retirement age – 55/56/57 and rising depending on how the government is feeling each budget and your year of birth.
- On current rules, you will get taxed on the money on withdrawal like income so if you are planning on having a £100,000/year draw down, the tax breaks are kind of nullified somewhat – should not apply to most readers of this blog!
- The government has fiddled with the rules on SIPPs and general taxation and will no doubt will fiddle again in the future, so with a 20+ year horizon this is a definite unknown risk. It therefore makes sense to spread your investments around into ISAs and other investment vehicles rather than sticking everything in one place.
- You can only claim the higher rate refief on earnings over the limit. So let’s say you conveniently earn £52,386 per year, and stuck £20K into your SIPP, you can only claim extra relief on £10K of that – due to the higher rate tax bracket being £42,386. (Thanks to commenter Dragon for pointing out that I’d missed out this crucial peice of info!)
For more information see the great Monevator post on ISAs vs SIPPs.
The final “downside” of the SIPP is that if you are on any of the higher rate tax bands you have to claim the extra relief yourself, which brings us neatly onto…
part deux – le self assessment tax return
This post, as is often the case, has gotten quite long and I prefer my posts to be bite sized chunks of financial goodness rather than a long slog of boredom, so will break out the second part of how to fill in your tax return to actually get the tax back.
Sorry to folks only on the 20% tax bracket, but part two will not apply to you. The good news is that you don’t have to bother doing anything to get your 25% boost on contributed funds, you just stick the money in, your SIPP provider will apply to HMRC on your behalf, and a month or so down the line it will just appear like magic in your account for you to invest wherever you would like. Bonus!
Have a great weekend and see you in a few days for part deux…. 😉
UPDATE:
Part Two is now available here
Notes:
- I am defining work by somewhat rudimentary terms of something that is a bit boring that most people would rather not do here 🙂 ↩
- You will see why I chose this amount in a minute, as it makes the figures all nice and round ↩
- Hopefully… if I’ve made things clear? As mud no doubt! As usual if you aren’t sure of anything give me a shout in the comments. ↩
Discussion (28) ¬
Why not ask HMRC to adjust your tax code to take your SIPP contributions into account? That way, instead of HMRC looking after your £3000 for a year or so, your net salary gets a £250 bump each month.
There’s even an example letter here – easy!
A Guide to Claiming Higher-Rate Tax Relief
Hi Charlie,
I was not aware you could do that, great tip and link.
Personally it’s not worth it for me because I don’t really make regular contributions, but sure that will come in handy for many readers.
Thanks!
I second the recommendation to get the HR relief up front from the tax office.
However, be prepared for a monster wait. I sent in my letter in March, waited for months and got a letter back in July telling me to supply more information that was in the original letter, spent hours on the phone, eventually got my cheque and new tax code and then finally got the tax relief in my pay slip today (Hurray!). I’d initially budgeted to get this back in May, which led to some useful enforced extreme frugalling for a few months.
This also means that you can put the tax relief back into this year’s pension (or ISA) contribution rather than waiting until the next tax year (this won’t matter for everyone, but it is more time in the market). I’d rather HMRC give me an interest free loan than the other way round!
It does involve having another spreadsheet to track what you’ve put in and when to avoid undercontributing and being put on the HMRC naughty step. For me this is a massive plus (gotta love a spreadsheet), and I combine it with my value averaging spreadsheet I made in response to TFS’s post on Mortgage vs investment. Yay for spreadsheets.
Oooh… I would love to see your version of the value averaging spreadsheet?! 🙂
I do the very same with my year end tax return for the business. Free money never sounded so good.
How does that work if you don’t mind me asking Getting Fired?
Surely you can’t put all your business profits straight into a SIPP (sorry if that’s a totally noob question!?)
Thanks for this post TFS. I think a lot of people are still unaware of how this all works. I discovered “the SIPP” and accompanying benefits about 18 months ago and have been paying as much as I can in ever since in order to help me fund the years between when I want to retire and my DB pension becomes payable.
I have slowed down on my contributions recently though because of the fact that, as you mention, withdrawals from a SIPP have to be taken in a tax free environment (if you are a 20% tax payer as I am) to get the full benefit or paid at a lower rate when you withdraw them if you are a higher rate tax payer now. Otherwise the only advantage is the 25% tax free part (though that’s worth having in itself). In other words it’s no use getting the tax advantage on the way in if you end up paying it back again on the way out.
I’m now pretty much funded to the personal allowance level for the years I need my SIPP to cover, so I’m currently investing any spare cash into the AVCs attached to my DB pension because they can always be taken tax free as part of the lump sum provision (a perk of the pre-2014 Local Government Pension Scheme which has now been withdrawn :-))
Yes the benefits must seem far more tangible once you start to near the withdrawal/tax free lump sum age, as you can work out exactly how much to put in there to optimise the tax in/out strategy etc…
It’s still worth starting early of course though!
The rules will no doubt have changed by the time I get to the correct age (whatever that will be as well!) but I’m sure the basic tax benefits will still be there, or people will kick off big time 🙂
One thing to bear in mind is that i think you will only get tax relief at the higher rate on contributions equal to or less than the amount by which your salary is in the higher rate bracket…
Yes of course Dragon!
Sorry I don’t think I made that very clear in the post did I?
I’ll make a quick edit to make it more clear.
Thanks!
I love SIPPs. Am not contributing much power month, as only want to generate a £10k p.a. pension (or equivalent in 20+ years’ time) from them with the rest going into the NISA… Flexibility is key at this time, and being at the younger end of the scale, I prefer the NISA in case I need the money for other things.
Cheers
Agreed, a balance between a SIPP and the NISA is definitely the way to go as you can’t access the SIPP money until at least 55. Anyone retiring extremely early will need access to their funds way before that.
Cheers M! 🙂
Dear all,
New subscriber here, need some Sipp advice.
Am currently getting a much higher than average salary, so while this lasts I want to minimise tax and maximise my savings potential. Here are the facts:
Six months into tax year paid 45k so far estimate 90k for tax year.
Have not filled isa allowance or my son’s isa yet.
Paid over 50% of salary in commissions, paid quarterly.
No sipp at present, just small stakeholder one getting approx 200 per month paid by company I work for.
Which is best low cost sipp provider around atm?
Should I lump as much as possible of remaining yearly pay into Sipp? What’s the limit?
Any other tips.
Cheers,
J
Hi Jimbo,
Thanks for commenting!
The limit to yearly pension contributions which covers your personal pension and any SIPP(s) you have I beleive is 40K per year. It probably makes sense to at least put some of your post tax earnings into yours or your sons ISA so I doubt you will get near to the limit to worry about it all that much though.
You don’t say what your expenses are so it’s hard to judge how much you could save but I would say maybe stick £30K into the SIPP thereby reducing your taxable pay to £60K and take home of £40,686.20 (that is factoring in £200 a month going to the work pension) and a tax bill of “only” £12,443.
(Remember if you want to end up with 30K in your SIPP you don’t actually have to put 30K in there, you will only want to put in 30K x 0.8 = £24K and the auto tax top up will do the rest, and then you’ll get another 6K tax rebate once you claim it back as well. Sweet!)
I just did a quick check on http://www.uktaxcalculators.co.uk/ for those figures so play around with that and see what works best for you.
Again depending on what you expenses are like you could then fill up hopefully at least one of the ISAs. Also you don’t mention your age, I would say £30K into a SIPP is quite agressive for someone under the age of 40 so maybe tailor it according to your age a bit (i.e. less in the SIPP the younger you are) as ISA’s are far more flexible and the government are fiddling with them less.
I think that is a pretty good start for someone with £90K earnings 🙂
Let us know what you end up doing or if you have any other questions!
Cheers
Hi TFS,
Thanks for your response. I think I am re-thinking my approach with a view to not put so much into the SIPP, as you never know, the Gov might change the 55 age limit and put it up pushing me further away from me, anything could happen in next 19 years.
I shall investigate Cash/Shares ISAs and look to fill those.
If I cannot get my company to salary sacrifice, can i just fill up the SIPP out of post taxed income and then claim back tax? (as per post ttle) is it taht simple?
Can I still also use previous years allowances? how long for?
Once I have these solved, next step is to pick my trackers/bonds and the right platform to do this on.
I’ll be back! 🙂
J
Hi Jimbo,
Can i just fill up the SIPP out of post taxed income and then claim back tax?
Yes, that is exactly what you can do (although read comments above as there may be easier ways to do this)
Can I still also use previous years allowances?
No but pension contributions are something like £40K per year so I reckon that should do you anyway, bearing in mind you also have ISA’s etc to use…?
Sorry for the late response!
with salary sacrifice, is there any need for self assessment, as the money sacrificed does not get taxed in first place, this is correct right?
Hi James,
That is correct yes, if you are a paid employee and your tax affairs are straight forward then you shouldn’t need to self assess in that instance.
Cheers!
Hi TFS, need some advice…..
Is it possible to advise on the rollover allowance with respect to SIPP contributions?
I wonder if I have been a bit enthusiastic in my SIPP contributions via heavy salary sacrifice.
Contributions by year:
13/14 – 0K
14/15 – 0K
15/16 – 0K
16/17 – 67K
17/18 – 35k to date , estimate 70k by end of tax year
By my reckoning I am OK as my last 3 years have unused contribution (40k per year – 67k = 120 – 67 = 53k, allowing my current run rate to stand).
However, does that mean I have to ramp down for tax year 18/19, as the prev 3 years to this could have exceed average 40k per year (70k + 67K = 137k , 17 k over 120k allowed…)
Does this mean I can only contribute max 23k of 40 k allowance in 2018/19 because of exceeding in previous years? or is 40K still possible?
Can any of your readers clarify this?
Hi James,
I’m no expert so please do seek some advice from HMRC or your SIPP provider I think is the best solution here, but I’ve just found a handy calculator from Hargreaves Lansdown which looks pretty Kosher:
http://www.hl.co.uk/pensions/interactive-calculators/carry-forward-annual-allowance-calculator
I put in your figures (using the projected £70K for 17/18) and it says you can still put another £50K in this year!!! So I think you are fine putting in at least another £40K (if not more) in 18/19.
So it looks like you are fine. A few things to note which I’m sure you are already aware of, also from HL:
http://www.hl.co.uk/pensions/sipp/pension-carry-forward
You need to:
Have had a pension in each of the years from which you are carrying forward, even if you haven’t contributed to it (the State Pension doesn’t count);
Have earnings of at least the amount you are contributing. For instance, to make a contribution of £120,000 and receive up to £54,000 tax relief you must have earnings of at least £120,000 this tax year.
Like I say worth giving HMRC or your SIPP provider just to be 100% sure I think though.
Cheers, and damnit I am envious of these contribution levels! 🙂
cheers, I will follow up at my end!
I’ve also done this and it’s free money! To echo the other comments, I’ve now changed my tax code to give myself the money owed monthly, I still complete a self-assessment to ensure everything balances.
Yea that seems the best/easiest way to do it although like you say I think I’d end up doing the SA just because I wouldn’t trust it to be correct.
Case in point, they started fiddling with my tax code last (tax) year and completely messed it up, then when I did the SA I owed them money. Annoying but would rather pay up then voluntarily than have them chase me down for it months/years later and make it out like it was my fault.
Cheers!