I am earning above the £50,000 tax threshold and want to pay money into a SIPP to avoid paying 40% tax. I also have existing shares and want to avoid paying dividend tax so am also keen to put these into a SIPP.

Can I transfer existing shares into a SIPP using ‘Bed & SIPP’ and also claim tax relief? Or do I need to put cash into the SIPP from my bank account in order to claim tax relief?’

Another related question is how do I inform HMRC of my SIPP investment in order to claim tax relief?

Ian

Rachel Vahey, AJ Bell Head of Public Policy, says:

Pensions enjoy many tax advantages, which rightly makes them a popular way of saving for later life.

One of those tax breaks is relief on pension contributions, and this advantage is particularly helpful to those who face moving into a higher tax bracket.

Tax thresholds have been frozen since April 2021, but as people’s earnings carry on increasing, millions are paying tax at a higher rate than they were previously.

Next year we can expect to add another 2.6 million to the ranks of higher-rate taxpayers, so, it’s worth more people knowing how pensions can help them out in reducing their tax bill.

In personal pension schemes like SIPPs, personal contributions are made from taxed income and the government then adds in tax relief at the 20% basic rate to the SIPP.

Anyone who pays tax at a higher rate has to make a claim for the additional tax relief, which they usually do through their self-assessment tax return (although anyone who is a higher rate taxpayer can also claim by telephoning HMRC direct).

HMRC will then adjust your basic rate tax band by your gross pension contribution, meaning you are due back some tax. HMRC will usually adjust your personal allowance to make this refund.

A word of warning though - you can only get a tax refund on the amount of contribution you pay higher rate tax on.

So, someone earning £60,570 this tax year, paying £40% tax on £10,000 and contributing £15,000 will automatically get 20% tax relief at source on the full £15,000.

They can then claim an extra 20% tax relief on £10,000 (the amount they pay higher rate tax on) through their self-assessment, but they will not get additional relief on the remaining £5,000.

In Scotland – where tax rates are different – pension savers still receive the automatic 20% tax relief, even if they only pay 19% tax, and can claim their additional 1%, 22%, 25% or 28% tax relief if they pay higher rates.

On the second part of your question, the capital gains tax allowance has been slashed in recent years from £12,300 to £3,000 meaning many investors are looking for ways to reduce their capital gains tax bill.

One solution is moving their shares into a SIPP, although again a word of warning - shares cannot be transferred directly into SIPPs under HMRC rules.

What you can do, however, is sell the shares, pay the proceeds into a SIPP and then buy the shares through the SIPP.

When you sell your shares, you may have a capital gain and that will use up some or all of your £3,000 allowance.

If your SIPP is held on an investment platform, such as AJ Bell, the proceeds can be paid into the dealing account and then moved across to the SIPP as a contribution.

The cash value of the shares paid into the SIPP counts as a pension contribution, and the good news is you should receive tax relief on it (as long as you are within your limits for tax relievable contributions – this is 100% of your UK earnings, with an overall annual allowance of £60,000 that includes yours and any employer’s contributions, and basic rate tax relief).

Furthermore, once the shares are within this tax wrapper the return on these investments won’t be subject to either capital gains tax or income tax.

DISCLAIMER: AJ Bell referenced in the article owns Shares magazine. The editor (Ian Conway) owns shares in AJ Bell.

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