Assume a person has income of £100,000 and pays tax of £40,000, so take home pay is £60,000. If that person pays £60,000 into a SIPP after 06 April 2006, presumably the tax refund is £24,000. Does this refund get paid to the individual directly or into the SIPP?
Secondly, can a SIPP borrow from the individual beneficiary, or must the borrowing be from an unconnected bank?
Isn't the total refund the full 40,000? Of which 16,923 (22/78 x
60000) will be added to the SIPP and the remaining 23,077 will be reclaimable via the tax return. But ICBW.Matti
I thought the refund was 40% of the contribution, i.e. 0.4 * £60K £24K.
Note: I'm reasonably familiar with the current tax rebate situation wrt personal pensions, and I assume the principles remain similar from April next year and for SIPPS. If not, disregard the following!
The principle is that personal contributions are made from earnings after income tax, but that the income tax charged will be rebated in full. Your contribution is assumed to be net of standard-rate tax, currently 22%, and that amount will be claimed by your pension company from the Revenue. It's calculated as 22/(100-22) of your contribution as I wrote above. If in fact the contribution came from that part of your earnings subject to higher-rate tax, you need to declare it in your tax return. The calculation is then automatically done in such a way as to credit you with the extra 18% (40% - 22%), and it achieves this by multiplying your original contribution by (40/(100-40) - 22/(100-22)), which comes out as the 23,077 figure.
Matti
Forget all that. If you make a net contribution of 40,000 it will be grossed up by 100/(100-22), making the notional gross contribution
51,282. The difference, 11,282, representing the standard-rate tax will be added automatically to your pension fund. Then the higher rate tax element (40 -22)% of the gross will be reclaimed in your tax return -- this is 9231. Therefore the pension contribution has actually cost you only 30,769.Matti
The date is immaterial. Assuming he has sufficient income to justify the gross payment (at the moment it's a percentage of his income and that percentage varies with age, but after 6th April will be very much more lenient and not depend on age), then if he pays 60,000 he gets 16,923 (22% tax relief on 76,923) paid into the SIPP by the Revenue (i.e. his gross payment is 76,923). He will then get another 18% of 76,923 relief (13,846) via his self assessment. So his gross payment was 76,923 but it only costs him 76,923 - 40% = 46,153.
At the moment, the maximum anyone can pay into a SIPP is 40% of their gross income per year (although they can use a carry-back facility in certain circumstances) and they have to be at least 61 to be able to do this much. After 6th April they will be able to pay 100% of their earnings up to
215,000 (more, if they don't mind paying tax on it).AFAIK the SIPP can borrow from the individual beneficiary (presumably you mean the guy in whose name the SIPP is set up). But there are limits on the borrowing potential.
Rob Graham
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