Paying into your Interactive Investor SIPP

Transcription

1 Your is a tax efficient investment to help you save for your future. Contributions can be made into your SIPP at any point and have the potential to receive tax relief. How much tax relief you can receive on contributions and how you contribute can be confusing. This guide explains how to contribute and how tax relief is collected. You may also want to take a look at our Guide to Pensions, which sets out the wider picture, and our Guide to Pensions Tax Relief for more about how tax relief boosts your pension. What s in this guide: Who can pay into your SIPP? How much can you contribute to your pension? The annual and lifetime allowances explained How much qualifies for tax relief? And what happens if you exceed the annual allowance? How is tax relief claimed? Paying into your SIPP Firstly, however, a reminder that we do not provide tax or investment advice. Pension regulations can be quite complex so do please refer to your tax adviser if you are in any doubt. Who can pay in to your SIPP? In short anyone! Typically, you and/or your employer will pay into your SIPP, but you can also receive money from a third party. Contributions that you make will usually have come from taxed income. Where your employer is paying in the money directly from your salary, they will do so after having deducted income tax. You may see these referred to as net contributions or having been made net of tax. Where you have confirmed on your form that your contributions are eligible for tax relief, we ll claim basic rate tax relief on your behalf. You may see this referred to as relief at source. If you re a higher or additional rate taxpayer, you can then claim higher rate tax relief via your annual tax return. Your employer s contributions, however, are not taxed and are paid gross into your SIPP. They do not attract any tax relief. (Some pension schemes will accept employer contributions on a net basis.) Prior to accepting and processing any employer contribution, due diligence may need to be completed. This could include details about the company and any shareholders who own 25% or more of the company s shares. We will contact them direct, but should we need any assistance from you, for example where we are not receiving the information needed in good time, we ll let you know. Contributions from another person, (that is someone, a company or legal body other than you or your employer) can be paid either net or gross of income tax. As with your own contributions, net payments may qualify for basic rate tax relief: we say may qualify as the tax relief is based on your tax circumstances not those of the person paying the money to you. As with employer contributions, prior to accepting and processing any third party contribution due diligence will need to be completed. For individuals this will typically be to verify their identity and confirm their relationship with you. We will contact them direct, but should we need any assistance from you we ll let you know. Page 1/5

2 Finally, two things to bear in mind about contributions: 1. To receive tax relief on pension contributions you must be a relevant UK individual - that is a person under age 75 who: has relevant UK earnings chargeable to income tax, or has (or is the spouse or civil partner of a person who has) earnings from overseas crown employment) is resident in the United Kingdom, or was resident in the UK at some time during the last five tax years and was also resident in the UK when they joined the pension scheme 2. Once you start drawing on your pension, the amount you can pay in is restricted. We ll cover this in the next section. How much can you contribute to your pension? You can pay in as much as you like to your pension, but there are three limits (or allowances) to be aware of: 1. You have an annual allowance in any one tax year. This is the maximum you can pay into your pension, from any source, and still receive tax relief on that sum. You can pay in more than the allowance but, except where you are using carry forward arrangements, you won t get tax relief on the amount over the annual allowance. The annual allowance for the 2015/16 tax year is 40,000 gross. (However, the Chancellor s July 2015 Summer Budget created a short window between 6 April and 8 July 2015 where, If you had made any contributions during that period, you could effectively have an allowance of 80,000 to 5 April see 2015 Summer Budget opportunity below.) 2. There s also a limit to how much your pension can be worth without incurring a tax charge. This is called the Lifetime Allowance. Unlike the annual allowance, which dictates how much you can add to your pension and still receive tax relief, the Lifetime Allowance is the total value you can accumulate in pensions. That includes capital growth and income from your investments. Currently, the maximum is 1.25m, but this will reduce to 1m from 6 April It is assessed at the point of taking pension benefits. Exceeding the LTA brings a tax charge of 25% or 55%, depending upon the exact circumstances. This can be a quite complex subject and we recommend you seek professional tax advice if it has the potential to apply to you. 3. Once you start drawing on your pension, whether a regular monthly payment or ad hoc lump sums, your annual allowance is reduced to 10,000 gross.this is known as the Money purchase annual allowance. Exceeding the annual allowance or money purchase annual allowance means you ll to pay tax on the excess at your marginal (or highest) tax rate. See What happens if you exceed the annual allowance. How much qualifies for tax relief? The total that can be paid in and qualify for tax relief cannot exceed the higher of 3,600 or 100% of your relevant UK earnings in that tax year. We ll explain net relevant earnings in a moment but for now note that the total figure also includes the tax relief you receive. (You may also be able to use earnings from previous tax years see the Using carry forward section below.) As the table below shows, you don t actually have to have any relevant earnings to pay into your SIPP, but contributions higher than your relevant UK earnings will not receive tax relief. Relevant earnings Max net contribution Basic Rate Tax relief claimed Total contribution 0 2, ,600 20,000 16,000 4,000 20,000 40,000 32,000 8,000 40,000 Page 2/5

3 If you have other pensions in addition to your SIPP, do remember that the annual allowance applies to the total contributions to all these pensions, not just your SIPP. As we ve covered in who can pay in, some contributions are paid net and some gross. A net contribution of 80 equals a gross contribution of 100. At first glance this may seem odd, given that basic rate tax relief is 20%. Here s why the gross figure is 25% more than the net. If you want 100 to go into your SIPP (and that contribution is eligible for tax relief), the Government will contribute 20% of that 100, i.e. 20. So take that 20 from 100 and you pay in 80. Of course, if you can afford to pay in 100 anyway, do that and the Government top-up is now worth 25, so a total of 125 is added. So what are relevant UK earnings? Confusingly, the term relevant UK earnings doesn t include all your income, nor does it have to be earned solely in the UK. It can be any of the following: employment income such as: pay, wages, bonus, overtime, or commission and other P11D benefits income from self-employment or a partnership redundancy payment above the 30,000 tax exempt threshold income from a UK and/or EEA furnished holiday lettings business patent income, where the individual alone or jointly devised the invention Pension income, Capital Gains, rental income and investment income is not classed as earnings and so aren t included in the definition of relevant UK earnings. What happens if you exceed the annual allowance? If you exceed the annual allowance, or, where applicable, the money purchase annual allowance, there is a tax charge at your highest tax rate on the excess. Effectively, this takes back the tax relief you ve received. Here s an example. Your employer pays in 30,000 to your pension. You pay in 20,000 on which you receive the Government s basic rate tax relief payment of 6,000. So that s a total of 56,000. The annual allowance is 40,000, giving an excess of 16,000 which is then taxed at your marginal rate. Given that your SIPP with us may be only one of various pensions you hold and contribute to, we won t always know if you exceed the annual allowance. So, you should keep track of all monies paid into pensions you hold and advise the HMRC - this is done via your annual tax return. Where the total paid in to your SIPP exceeds the annual allowance we ll write to you each year confirming the total credited and what you then need to do. HMRC will notify you of the tax charge due and you may, if you wish, instruct us to pay some or all of your annual allowance excess tax charge from your SIPP. If this applies, please send us a message via your account message box for further details. Using carry forward If you ve used your annual allowance but have been a member of a pension scheme for the previous three years, there s a way you can add more to your pension and still get tax relief. The carry forward rules allow you to include in the current tax year, allowances you ve not used in the previous three. This can be particularly useful when you receive a windfall. However, do bear in mind that to use carry forward and receive tax relief, you need to have sufficient relevant UK earnings to cover the total contribution you are now making. Equally, carry forward cannot be used if you have started drawing on your SIPP. Page 3/5

4 Here s an example of how it would work, using the previous three tax years allowances: Tax Year Contribution Made Annual Allowance Carry Forward Total Allowed to Carry Forward 2012/ ,000 50,000 20,000 20, / ,000 50,000 30,000 50, / ,000 40,000 25,000 75, /2016 You can bring forward a total of 75,000 into the 2015/16 tax year Summer budget opportunity The Chancellor s Summer Budget of July 2015 creates another facet to the carry forward process. Because the Budget introduced a new, lower, annual allowance for high earners with adjusted income of 150,000 from 6th April 2016, and such changes are not usually back-dated, it effectively created a mini-tax year. We recommend you speak with your tax adviser if there is the potential for this to apply. Date 6th April th July ,000 Annual Allowance The unused annual allowance between the above dates will be carried forward to the second period, up to a maximum of 40,000 9th July th April to a max of 40,000 Here are some examples: Robert contributed 60,000 on the 5th May ,000 counts towards the annual allowance of 80,000, so he has an unused allowance of 20,000. This new annual allowance for the period of 9th July 2015 and 5th April 2016 is 20,000. Amy contributed 30,000 during the first period. She therefore has an unused allowance of 50,000 for this period, but as the maximum for the second period is 40,000, that s her limit. Eric didn t contribute at all during the period 6 April to 8 July He has 40,000 to contribute up to 5 April How is tax relief claimed? We work with our scheme administrators to claim basic rate tax relief on your behalf. Claims are made on a monthly basis. Contributions from the 6th of one month to the 5th of the next are submitted to HMRC by the end of the second month. HMRC then processes those claims and pays the money to our scheme administrators to credit to your SIPP bank account. This usually takes up to 12 weeks in total. So, as an example, tax relief on contributions made between 6 April and 5 May will be available in your SIPP to invest by the end of June. If you are a higher or additional rate tax payer, further tax relief can then be claimed via your annual tax return. Page 4/5

5 Paying into your SIPP For many people, their first contribution to a SIPP will be a transfer from an existing scheme. Once you ve given us the transfer authority, we ll handle that for you. Then, you ll probably want to pay in, either as a regular contribution (either directly from you or via your employer) or with ad hoc payments when you can. Contribution forms Whichever way you choose, we ll need you to complete a contributions form. This includes your confirmation that you re entitled to receive tax relief. Contributions and transfer forms are available on our website. A new form is needed whenever you amend your payment or make an additional one. The completed and signed form should be sent to the address shown on the form at the same time as you pay funds into your SIPP bank account. This is because we can t normally release funds from that account into your SIPP with us until we have received the matching contributions form. A SIPP bank account is required by FCA regulations and is managed by our SIPP trustees. It provides a record of all monies you, or anyone else, pays into (or money you withdraw from) your SIPP. We ll advise you of your bank account details when you open your SIPP. Money in that bank account is, like other cash savings, covered by the FSCS. Once money has been paid into the bank account and is cleared, our administrators will pass it across for crediting to your SIPP, ready for you to invest. In the same way, where we collect basic rate tax relief for you, this is also credited to your SIPP bank account and then passed across and added to your SIPP. Dividends and any other income received from your investments, however, go straight into your SIPP. Making regular contributions The contributions form includes the option for you to make regular contributions; monthly, quarterly, bi annually or annually. We ll collect these from your bank account via direct debit on the first working day of the month. Just complete the direct debit authority. Your bank will typically need 10 working days to set up the direct debit before we can collect your first payment, so please allow for this in your timings. Your employer, or another person, can also arrange for their contributions to your SIPP to be collected by direct debit. Obviously, they will need to sign the direct debit authority. When amending the amount you, or they, are paying by direct debit, we ll need your new instruction 10 working days before the next payment is to be collected. And a new contributions form to reflect the changed amount. A couple of other things to bear in mind: Larger sums may not be able to be transferred to your SIPP bank account in one go as banks may identify this as an unusual payment or limit new transfers to a certain sum. Your bank will be able to provide more information about any such processes. Where you are making multiple payments, for example a contribution of 30,000 is split into 3 payments of 10,000 each, it will be helpful for us to be aware. Please add a note to this effect on your contribution form as this avoids any undue delay in moving the money across to your SIPP, ready for investing. Employer contributions. Our SIPP administrators will need to complete the necessary due diligence checks on employers in order to comply with anti-money laundering regulations. This may delay collecting the first payment to your SIPP. Your employer may, as part of that check, need to provide details of any shareholders who own 25% or more of the company s shares. Page 5/5

6 Contributions from other people. Anti-money laundering checks may also apply to third party contributions. We will contact the third party directly should this be the case. Third parties should understand that, in making a contribution to your SIPP, it cannot be returned to them. In specie contributions Finally, contributions into your SIPP can also be made by transferring existing investments you may hold. This is known as an in specie contribution. In specie contributions can be made by you, your employer or a third party but, under HMRC regulations, the investments cannot simply be added to your SIPP. As well as completing a contribution form for the value being paid in, a separate in specie contribution form is also required. Since you ll have to tell us the amount being contributed before the investments are actually transferred, there can be a difference in value between what you expected the investment to be worth on transfer, and the value it has at the point the transfer is completed. That value could be higher or lower. Where the value on transfer is higher than stated on your contribution form, you ll need to let us have a second contribution form to account for the difference. Where the value is lower than stated on your contribution form, you can make a cash contribution to make up the difference, or complete a new contribution form for the lower amount. Any other questions? If you ve question about contributing to your SIPP, simply call us or send a message via your account message box. We ll be happy to help. Page 6/5