Coming up to the end of the tax year, this is the time many start thinking about their tax bill and steps they can take to reduce the dreaded tax bill.

It’s no secret that earning a lot will come with a hefty tax bill, but is there anything you can do to reduce the amount you need to hand over from your hard-earned cash?

In this article, we’ll show you how a bit of planning and a Self-Invested Private Pension (SIPP) can help you retain more of your earnings if you earn over £100,000 as an umbrella contractor.

What Is a SIPP?

A SIPP is a type of personal pension that allows you to control your retirement savings. Unlike traditional pensions, SIPPs offer many investment options, including stocks, funds, and property. They are particularly attractive to high earners due to the generous tax relief they offer.

At SmartWork, we’ve partnered with Interactive Investor (ii), a Which? recommended SIPP provider to make it easier for our contractors to benefit from these advantages. More details on how to set up an ii SIPP through SmartWork will be provided later in the article.

Now let’s go through how the tax benefits a SIPP can provide:

Keeping Your Personal Allowance

The personal allowance—currently £12,570—starts to reduce by £1 for every £2 you earn over £100,000. This means the effective tax rate on your income between £100,000 and £125,000 is a whopping 60%!

So, to retain your personal allowance, you need to reduce your taxable income to below £100,000. Paying any pre-tax income over the £100K threshold into a SIPP is a perfect way to do that, as it offers multiple benefits.

Example

If you earn £125,140 and contribute £25,140 to your SIPP:

• Your taxable income reduces to £100,000.
• You retain your full personal allowance of £12,570.
• You avoid the 60% tax trap on the income between £100,000 and £125,140.

Tax Relief on Contributions

When you contribute to a SIPP, you can also enjoy significant tax relief. This means your contributions work harder for you, as you can reclaim more of your hard-earned money while preparing for retirement.

• The government automatically adds 20% tax relief to your contributions.
• Higher-rate (40%) and additional-rate (45%) taxpayers can claim extra tax relief through self-assessment tax returns.

Example:

Suppose you contribute £8,000 to your SIPP:

• The government adds £2,000 (20% tax relief), making it £10,000.
• If you are a higher-rate taxpayer, you can claim an additional £2,000, reducing the net cost to £6,000.
• If you are an additional rate taxpayer, you can claim an extra £2,500, reducing the net cost further to £5,500.

Additional Benefits of a SIPP

SIPPs don’t just offer tax relief—they also come with other advantages:

• Tax-Free Growth: Investments within a SIPP grow free from UK income tax and capital gains tax, ensuring your retirement savings grow efficiently.
• Tax-Free Lump Sum: At retirement (from age 55, rising to 57 in 2028), you can take 25% of your SIPP savings as a tax-free lump sum.
• Inheritance Tax Planning: SIPPs are often exempt from inheritance tax, making them an effective tool for passing on wealth.

Getting Started with the ii SIPP Through SmartWork

Contributions to an SIPP are easy. You can make a lump-sum payment or set up regular monthly contributions, which SmartWork handles for you.

At SmartWork, we make it simple for our contractors to set up and contribute to the ii SIPP.

Here’s how you can start:

1. Contact Your Business Manager: Reach out to discuss how to allocate part of your assignment rate to SIPP contributions.
2. Set Up Gross Employer Contributions: Contributions will be deducted from your overall contract income, reducing your PAYE tax and employee NI liability. SmartWork also passes on any employer NI savings.
3. Manage Your Investments: Use Interactive Investor’s online platform and app to manage your SIPP and explore various investment options.
4. Maximise Tax Relief: Claim any additional higher-rate or additional-rate tax relief through self-assessment.

You can find more information on ii’s website through this exclusive page for SmartWork contractors: https://www.ii.co.uk/ii-partners/smartwork-umbrella.

Choosing the Right Umbrella Company

If you are in the market for an umbrella company, please ensure they are compliant businesses that can handle your PAYE deductions accurately and provide the necessary documentation to support your tax relief claims.

You can also work with SmartWork, of course. We have been around for over twenty years, helping contractors with their contracting careers through our FCSA-accredited, compliant service. We pride ourselves on our excellent reviews and the extensive range of benefits we offer to our workers.

Conclusion

If you earn over £100,000, contribution to a SIPP is a strategic move that helps you save tax and, amongst its other benefits, can help you save for your retirement.

By partnering with ii, we aim to bring our workers the benefits of tax efficiency through a seamless and straightforward process for making SIPP contributions.

Call 800 434 6446 or email info@smartwork.com today if you have any questions about our umbrella services, including pension contributions.

It is important to understand that the use of Gross Employer Contributions or the ii SIPP is not a recommendation and that the ii SIPP is not an Employer, Workplace or Auto Enrolment Pension. The ii SIPP is a Personal arrangement between you and Interactive Investor, and you are solely responsible for agreeing & monitoring contributions made by your employer. 

The value of investments made within a SIPP can fall as well as rise and you may end up with a fund at retirement that’s worth less than you invested. You can normally only access the money from age 55 (age 57 from 2028). The ii SIPP is intended for customers who have sufficient knowledge and experience of investing to make their own investment decisions.

It is important to note that when you come to take income from a pension, it is treated as taxable income, and you will pay tax at the applicable marginal rate. This communication is not intended to be a personal recommendation. If you are unsure about the suitability of a SIPP or transferring any existing pension plan(s) into a SIPP, you should seek advice from an authorised financial advisor. Tax treatment depends on your individual circumstances and may be subject to change in the future.