Private SIPP Pension

Would be grateful if you can clarify the confusion regarding putting money into a private SIPP pension after receiving income above £50k: 1) Will putting money into private SIPP pension means it will reduce the taxable income as the tax will be calculated on the earnings left after SIPP pension payment? 2) Or does it reduce the tax bills by increasing the 20% tax rate thresholds level above 50k by the amount of pension payment made? 3) Or are the benefits just only seen with topping up of the private pension contributions by the pension scheme/government and these benefits seen on withdrawing money after retirement? Thank you

Hi,

If you pay into a works pension scheme, the employer normally deducts your pension payment before calculating the tax due on your income after the pension payment is removed.  This gives you tax relief at the highest rate your pay on your pension payments and no further relief is due.  

If you pay into a pension scheme after your employer had deducted tax on your income, then you would automatically receive 20% tax relief at source on payments below the threshold limit of £40000.00.  This threshold will be reduced if your income is high enough.  You can then claim personal pension relief (PPR), to extend your basic rate by by the amount of pension paid in. The effect of this is to increase tax deducted at 20%, by extending the basic rate band, which has the effect of reducing income taxed at 40%.  

If you are entitled to further PPR and do not need to complete a Self Assessment tax return, you can claim PPR, by writing to HMRC and enclosing evidence of payments made, otherwise the gross payment is entered into box 1 of page 4 SA101 (TR4.1).

Thank you.