In a married couple where one is a basic rate tax payer and the other a high rate tax payer would it make sense for the high rate tax payer to open a SIPP to take advantage of higher tax contribution?

04 February 2022

Question by Chiluba

In a married couple where one is a basic rate tax payer and the other a high rate tax payer would it make sense for the high rate tax payer to open a SIPP (rather than the basic tax payer) to take advantage of higher tax contribution? Are there any tax implications when it comes to withdrawals i.e. with the SIPP being in the name of the person who pays the higher tax rate and can these be alleviated by both having SIPPs?


Answered by Adam Holt

Hello Chiluba,

You have raised a good point regarding tax efficiencies between spouses. I can’t comment on your personal situation as I obviously would need to know a lot more information, so I have made my response rather generic.

The individual that contributes into their SIPP receives tax relief at their marginal rate. If you are a basic rate tax payer then you receive basic rate tax on the way in. e.g. if you were to contribute £80, then HMRC would add £20 making a total of £100 in the SIPP. If you are a higher rate tax payer and contribute £80 then you would still receive the same basic rate tax relief top up of £20 by HMRC but you would then be able to claim the remaining £20 relief via your self assessment tax return. Therefore, the tax man will pay you back an extra £20 and you will have contributed a net £60 into the SIPP with a grossed up value of £100. One important thing to note is that you can only receive higher rate tax relief on the taxable income you have at the higher rate tax band anything extra will only get you basic rate relief.

When it comes to withdrawing money from the SIPP, you can receive up to 25% of the pot tax free (subject to the pot being less than the life time allowance currently £1,073,100). This could be in the form of one lump sum payment or spread over some time, (depend on what flexibilities your pension provider offers). The remainder of the pot is taxed at the individuals marginal rate. Therefore, if the original higher rate tax payer was then a basic rate in retirement then they would only pay 20% tax on the taxable part of the pension pot.

Pensions are a complicated business and there are a lot of other variables in play that could affect how much and who should be contributing. But based on the basic information you have given of a married couple, with one being a basic rate tax payer and one being a higher rate tax payer it could definitely make financial sense for the higher rate tax payer to make the contribution as they would then receive a higher rate of tax relief.

I hope that provides you with some help.
Adam

Answered by

Adam Holt

Independent Financial Adviser

I’m an Independent Financial Adviser who splits time between my office in London and working from home in Kent.