SIPP Pension contributions and offsetting tax

[Freakuk]

Friend of mine asked me for advice on this, but I'm no expert and advised him to speak to an accountant and/or an IFA.

While he decides on who to speak to I thought I would ask here as I know there are some switched on financial types.

So said friend has just changed jobs and role and has a significant rise in £££. He's a contractor and in IT like myself, but now looking at £1k per day but inside IR35.

What can he do to reduce his tax liability here, I've suggested putting as much as possible into his SIPP at source and I believe you can contribute £60K per year max.

From memory there's about 230 working days per year on average after holidays etc. So he would be earning £230K gross, minus £60K pension so £170K before any tax.

If he did nothing and just let HMRC pull his pants down what would his average monthly take home be after tax, and again if he maxed his pension contributions what would that look like? There are probably some other factors that he would need to discuss with someone, but ballpark would be a good start for now.

[bogie]

£60k into SIPP is the max to get tax relief, you can put more in, theres just no additional tax relief

salary calculator here to play around with, obviously with those earnings there is no personal tax allowance

https://www.thesalarycalculator.co.uk/salary.php

You pay £48k into SIPP per year, £4k per month. The SIPP provider claims back £1k per month tax relief automatically into the pot.

You then get further tax relief via self assessment at taxyear end depending on earnings, say another £1k per month ...the exact figures will vary based on earnings, charity contributions, work from home, any other reliefs you can claim that increase the personal allowance, but thats the gist of how it works.

[HH7777]

He should definitely speak to an accountant/IFA. While the Annual allowance is £60k, that doesn't mean that is all you can put in for one year. He may be able to carry forward for previous years (up to 3), which means a lot of the funds could go into a pension. All of which will receive tax relief.

[scot_aln]

Hopefully as a contractor earning a £1k day rate they are pretty IT literate so can search around on one of the contractor forums. I'd also assume inside IR35 role they will be using an Umbrella. They will provide various calcs modelling options. There can often be a cap on max billable days which will fall short of the 230 day calc.

Excluding any pension salary sac etc then you can use something like https://www.contractorcalculator.co.uk/insideir35c... which will show what your mate be earning post tax. The employer and employee NI take sucks but the inside rates are usually upped to counter that.

[The Ferret]

HH7777 said:

He should definitely speak to an accountant/IFA. While the Annual allowance is £60k, that doesn't mean that is all you can put in for one year. He may be able to carry forward for previous years (up to 3), which means a lot of the funds could go into a pension. All of which will receive tax relief.

Defo speak to an Accountant, as with those earnings he could be very close not having the £60k allowance, even more so if there are any bonuses or other sources of income. His allowance could be as low as £10k.

[Rufus Stone]

bogie said:

£60k into SIPP is the max to get tax relief, you can put more in, theres just no additional tax relief

Not true if you have carry forward available and sufficient net relevant earnings in the tax year.

[Jockman]

Rufus Stone said:

bogie said:

£60k into SIPP is the max to get tax relief, you can put more in, theres just no additional tax relief

Not true if you have carry forward available and sufficient net relevant earnings in the tax year.

Still not enough. You need to have an actual pension in place during those years otherwise no carry forward.

OP you can make Pension contributions for other people eg wife, kids, grandkids up to certain limits. Tax relief however will be at their marginal rate.