Everyone knows that pension contributions are a great way to get money out of your business and save up for retirement. What you might not know, however, is that while auto-enrolment pensions work great for modest salaries, anyone paying more generous amounts into a pension might consider bespoke pensions or a Self-Invested Personal Pension (SIPP) (or SSAS) pension instead. Especially if you like the idea of knowing how and where your pension is invested.
So what are the options and intricacies of paying into a SIPP pension?
How do you organise to pay into a SIPP? And how does this affect the payroll calculations? This is what this article is all about.
| Note: This blog doesn’t delve into whether an auto-enrolment pension scheme, a bespoke pension scheme or a SIPP (or SASS) pension scheme is the best option for you. This is a very individual decision, and advice about that choice can only be given by regulated pension advisers. If you want individual advice, then please get in touch with us at [email protected] and we can connect you with a professional. |
Setting up a SIPP
Pensions are a regulated area, so the first question is: “Do you go online and do it yourself without advice, or do you pay for regulated advice?”
While you can use one of the online SIPP providers and go down the DIY route, we recommend that you seek the advice of a financial adviser as they can help you choose a SIPP provider and set up your SIPP for you.
We know what you´re thinking…Yes, you will have to pay for financial advice and for an adviser to set up a scheme for you. However, a DIY approach will cost you time (which also costs). This is a potentially huge financial decision, so if you do choose the DIY route – please do so with caution and plenty of research. After all, this is your retirement income you are messing with!
How to set up employer contributions to your SIPP
Setting up a company contribution to a SIPP should be pretty straightforward if your employer is willing. If you are the business owner/manager, then you can be pretty certain the employer is willing!
Once your employer agrees, you should simply give them your SIPP account details, get them to set up a payment process (normally either DD or bank transfer each month), and ask them to complete the employer reporting process.
A pension contribution from your payroll is an HR legal matter, so your employer might need more than just an email from you. They might have an HR form or specific wording that you need to give them to authorise them to make the deductions.
Tax relief on SIPP pension contributions
This can be a complex point, so it’s important to clarify how you and your SIPP provider will make payments into your SIPP. It´s also equally important that your company knows what to do so that they set it up correctly.
There are options here! The setup options are:
- You might have just an employer contribution, or;
- You might have an employer contribution and either:
- a ‘salary sacrifice’ pension contribution,
- a ‘net pay’ contribution, or;
- a ‘relief at source’ contribution.
What is the difference?
It’s all about tax relief, its impact on net pay, and how much goes into your pension scheme.
For example, if your SIPP employer contributions are set up on a salary sacrifice or net pay basis, your tax relief will be included in the payroll calculations of your contribution. This applies whether you pay the basic, higher or additional rate of income tax.
However, if your SIPP pension contribution comes from your taxed income (known as a ‘relief at source’ scheme), only basic rate tax relief will automatically be applied, and this will be claimed by your pension company. It´s important to note that higher and additional rate taxpayers will need to claim tax relief, and hopefully a tax refund, through their self-assessment tax returns. (And yep, we can sort your tax return and claim pension tax relief for you!)
For many people, it’s more tax-effective for employers to make contributions to their SIPP on a salary sacrifice basis. If your employer doesn’t offer a salary sacrifice, it’s always worth discussing the option with them. It’s straightforward to set up and saves the employer money, too. Get in touch, and we can help sort this out for the employer and you!
What’s the next step?
If you´re feeling confident enough to research and set up your SIPP yourself, go for it! However, if you feel like you need the support of someone who knows this stuff, then please reach out. We can help operate your company payroll (and more) and make sure this stuff is done right.
Get in touch with us at [email protected] today.
