How the Sipps tax rebates work.
There is no difference in the tax treatment of a Sipp compared with other forms of personal or occupational pensions.
Whatever you put in qualifies for tax relief at your highest rate (although from April 6 2010, there are special rules which cut the tax rebate for those earning from £100,000 upwards a year).
But unlike most pension schemes which only accept cash, you can put assets such as shares or commercial property into a Sipp.
This is what happens. The asset is valued. It then automatically gets a 20% tax credit. Suppose the asset is £80,000 (and Sipps are intended for larger funds although you can start with £5,000), the taxman makes this up to £100,000. The extra £20,000 is in cash which can be turned into shares or other investments or kept in the bank account section of your Sipp.
When the person owning the Sipp then fills out their tax form at the end of the year, assuming that they are a higher rate taxpayer, they will then be able to claim a cash rebate equivalent to the difference between the 20 per cent credit already received into their fund and the 40% tax rate.
Because your £80,000 asset is the net amount, it has to be “grossed up” and, because of the wonder of percentages and Revenue maths, this gives a further £33,333 so you know have £133,333. It’s up to you how to use the extra £33,333.
Got that then? Don’t worry if not. Your financial adviser – and later on your accountant – should be able to spell it out if you don’t!
The Tax Details (Yawn)