Put your bonus in your SIPP now or lose the tax advantage

Recipients of end-of-year bonuses who do not put the cash into their pension pots before the end of the tax year risk losing the opportunity to make the most of their windfalls, according to EBS Management, the pensions arm of Charles Stanley.

Even if investors do not yet know their total incomes for the tax year, they can contribute estimates of earnings and correct any discrepancies later, said Kate Ragnauth, Director of EBS Management.

She said: “There is no longer any opportunity to carry back your entitlement from one year to the next, so the message from the Government is effectively that you use it or lose it. However HM Revenue and Customs does allow you to invest on the basis of estimated earnings, so even if you do not have completely accurate figures before the tax year ends you do not have to wait until you do. Any errors can be corrected in the new tax year.”

If a SIPP investor’s earnings turn out to be lower than expected, the excess contributions may remain within his or her pension fund, but any reclaimed tax must be repaid to HM Revenue and Customs (HMRC). Alternatively the investor can remove the excess from the SIPP and repay the reclaimed tax to HMRC.

Personal contributions into a SIPP are paid net of basic rate tax, which is then reclaimed from HMRC by the SIPP administrator and paid into the individual’s pension fund. Higher rate tax payers usually claim the difference between basic rate and higher rate tax relief via their self assessment return. Tax relief on contributions is limited to 100 per cent of relevant UK earnings for the tax year in which the contributions are paid. It is also limited by the annual allowance and ultimately by the lifetime allowance (£1.5 million in this tax year; £1.6 million in 2007-08).