With possible changes to SIPP Tax Relief to be announced in the March 2016 Budget, it’s worth you checking out your options now in case you might miss out on a lot of extra money for you and your family
The Expected SIPP Tax Relief Reductions Could Cost You Thousands
SIPP Tax Relief Is Just One Of Four Tax Benefits Associated With SIPPs
By way of a quick reminder, here’s a brief summary of why a SIPP could be one of your most important tax planning tools.
1. SIPP Tax Relief
You could currently enjoy up to 45 per tax relief on your savings. The higher your Income Tax rate, the more SIPP Tax Relief you can claim. As the level of SIPP Tax Relief could be reduced soon, there could be limited time left to give this area some serious consideration.
2. Tax Free Growth On Your Savings
The money you shelter within your SIPP grows free of Income Tax and Capital Gains Tax.
3. Tax Free Cash
Once you reach age 55, you can normally draw up to 25 per cent of your fund free of tax.
4. Inheritance Tax Free
Whatever money is left in your SIPP on your death can be passed to those you leave behind free of Inheritance Tax.
How SIPP Tax Relief Works
If you’re under age 75, SIPP Tax Relief could be worth up to 45 per cent. Incredibly, you can also claim SIPP Tax Relief of 20 per cent even if you don't pay tax!
You save your contribution net of basic rate tax relief at 20 per cent. Within six to eight weeks, your SIPP operator will have claimed the SIPP Tax Relief from HMRC, which will be paid to your SIPP Bank Account, ready for you to invest.
For example, if you save £4,000, £1,000 is added to your SIPP Bank Account courtesy of HMRC, enabling you to invest £5,000.
If you pay higher rate tax at 40 per cent, you could claim back a further 20 per cent through your tax return. That’s an extra £1,000 in our example, making the net cost of your £5,000 investment just £3,000.
If you pay top rate tax at 45 per cent, you could claim back a further 25 per cent through your tax return. In this case, your £5,000 will have only cost you £2,750.
Possible Changes To SIPP Tax Relief
Following the Government’s review of pensions, in his March 2016 Budget, George Osborne has indicated he’ll announce his conclusions. It’s widely expected he’ll introduce a new single flat rate of SIPP Tax Relief, irrespective of the rate of Income Tax you pay. This change has the backing of a number of pension experts and the Pensions Minister.
A fixed SIPP Tax Relief within the 20 per cent to 33 per cent range has been mooted, which would affect higher rate and top rate tax payers, as you can see in the table below.
Also under discussion is the total removal of SIPP Tax Relief, to be replaced with tax-free withdrawals, similar to ISAs. It goes without saying this could have repercussions for us all.
As higher earners have always been the primary beneficiaries of SIPP Tax Relief, it’s an easy win for George Osborne if he introduces a flat rate. It could slash billions from the estimated £34 billion that pension tax relief costs the Treasury each year.
Could You Be A SIPP Tax Relief Winner Or Loser?
The table below illustrates whether you’re likely to be better off (green) or worse off (red) should the current SIPP Tax Relief regime be replaced with a fixed rate system. It's based on a contribution of £40,000.
How Much You Can Invest In A SIPP
The annual allowance for SIPP contributions is £40,000. If you earn less than £40,000, you’re usually limited to saving a maximum of 100 per cent of your earned income.
There are, however, a number of scenarios that may permit you to save more than 100 per cent of your earnings to maximise your SIPP Tax Relief, or are worth considering for other reasons.
Asking Your Employer To Contribute On Your Behalf
Subject to the annual allowance limit, your employer may be able to contribute more than you earn. However, HMRC may challenge this if your total remuneration package is excessive for the job you do.
Claim SIPP Tax Relief Even If You Don’t Pay Tax
All UK-resident non-tax payers can save up to £2,880 net in a SIPP, collecting a further 20 per cent in SIPP Tax Relief from HMRC, worth £720. This money is genuinely “something for nothing”. So if you or members of your family are happy holding money within a SIPP, it seems to make good sense to claim an extra 20 per cent to boost the value of your investments, especially when interest rates are so low.
Save An ‘Extra’ £40,000
If you saved less than £40,000 in pensions from 6 April 2015 to 8 July 2015, your contributions don’t count towards your annual allowance. You effectively have a new £40,000 allowance from 9 July 2015 to 5 April 2016, enabling you to make an unexpectedly high £80,000 contribution in this tax year. Your total SIPP Tax Relief in the 2015 / 2016 tax year could be up to £36,000.
The £180,000 Contribution
If you’re a higher earner, you may be able to save up to £180,000 and claim up to £81,000 in SIPP Tax Relief by carrying forward unused allowance from previous years. You can use HMRC’s calculator to work out exactly how much SIPP Tax Relief this could be worth to you.
Save While You’re Drawing Your Pension
If you’ve drawn benefits from your pension since 6 April 2015, including converting capped drawdown into flexible drawdown, or had flexible drawdown before this date, you could save up to £10,000 each year, subject to your earnings. This contribution would qualify you for SIPP Tax Relief.
Don’t Put Off A Review Of Your SIPP Tax Relief
On the basis that any forthcoming changes to SIPP Tax Relief are unlikely to be more attractive than they are today, it might well be worth you bringing forward any future contributions you’re intending to make. As you saw from the table above, it could literally be worth thousands of pounds to you!
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk. Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.
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This article is based on our understanding of current legislation and tax benefits at 1 February 2016. These can vary over time and may be different depending on your individual circumstances. The information is not personalised financial advice.