tax + NI issues post April 2006

**Bradley** · 29 March 2005, 10:41

Re:Commission

That'll be £5k plus the 6 to 7% commission they'll get for tying in your money until you're 55?

You can pay into a UK based pension fund entirely tax-free anyway. Why put it into an offshore fund when the commission they take will undoubtedly cover any tax they may save offshore?

I'd take a very sceptical look before I leapt with that idea.

**rootsnall** · 29 March 2005, 12:22

Re: Re:Commission

I didn't make it clear but I've no intention of doing any offshore route, it'll be my UK Ltd Co paying directly into a UK based pension ( SIPP probably ). Whereas you are limited to £3,600 or a percentage of your salary ( 20% in my case ) at present, from April 2006 there'll effectively be no limit. Hence if you earn £80K gross for the year you could pay all £80K direct into a pension with zip tax or NI to pay. That is an extreme but if I understand things correctly you can get your tax bill to zero. It seems a pretty good way of getting upto speed pension wise if you've been on the low salary via Ltd Co setup for years and can afford to live off savings. However I can't believe the government will be happy if you don't pay them a penny !?

Personally I wouldn't touch overseas pay setups with a barge pole. I've looked into it a time or 2 when working in various locations and you pay the experts a big whack but take all the risk yourself. I raised the legality of one scheme being sold with a reasonably well know accountant dealing with contractors and he lost interest quickly. May be different now but I doubt it !!!!!

**ASB** · 29 March 2005, 15:08

A flaw

There are a couple of issues that immediately spring to mind with trying to use a pension as a shelter.

Firstly you can't get owt out until you are 50 (although this may be changing).

Secondly take a long hard look around the lifetime cap. This seems to be a cap on value, any fund value in excess of that is taxed severely.

You may well find it is rather easier to get to a fund value around the cap than you think.

**rootsnall** · 29 March 2005, 15:36

Re: A flaw

If I make the cap value I'l be a very very happy man and will gladly pay any penalties, its very unlikely. The cap is £1.5m and will rise, I'm looking to put away enough to keep me above the breadline when my contracting days are long over, a £300K pot would be a good start. The age you can get it out will rise to 55 and I wouldn't be surprised if they push that up. However if it is possible to avoid all the NI aswell as the tax its a very good tax break if you are on a decent income through your Ltd Co. It would be my target to keep me contracting through those tough days like today !!!

**ASB** · 29 March 2005, 19:13

That cap

Is nowhere near as generous as you seem to think.

Especially if you decide to fund it aggressively or transfer assets that are not currently within your pension (property is a common one, possibly even your main residence).

Assumption time. You seed it with 300k. The assets remain invested for 30 years, they grow at 6%. This is now worth 1.7m against the cap of currently 1.4,

(If the cap is increased at say 2% pa then the cap at that point will be 2.53m, but increasing the cap is in the gift of the chancellor and may well be pretty high on his hit list).

Another alternative, say you put in 20k p.a. You'd breach the cap (on a 30 year timeframe) after 22 years of contributions (I could have pressed some wrong buttons doing the sums).

You might be happy with paying 55% of any fund value in excess of the cap, but don't fool yourself into thinking this is a suddenly more generous regime. There are some advantages (e.g. relief on contributions upto 100% of salary) but ther could be a big gotcha at the end of it.

I am not saying don't do it, just consider all the options.

**rootsnall** · 30 March 2005, 09:17

Re: That cap

I think I'll be OK, I'll only go aggresive while I'm still contracting. The money going in will save tax + NI of between 40-52% assuming you are paying everything via PAYE if not using the pension route. I think it is too good to turn down if you can afford to do without the money until 55+. If I'm over the cap so will a hell of a lot of other people, I think increases in the cap are already built in for quite a few years.

**IR35 Avoider** · 30 March 2005, 09:35

Re: That cap

I can't believe the number of newspaper articles I've seen complaining about the cap. Any moderately intelligent person should be able to calculate how much they can put into their pension so as not to breach the cap, and if they are "unlucky" enough to enjoy above-average investment returns they can always switch their fund into index-linked bonds to slow down the growth rate (and get less risk in return.)

I.4M cap should give a pension of minimum 70K - I reckon that with a paid off house and no children to provide for I can live comfortably on after-tax income of 15K . How can newspaper people whinge about not being given tax-relief to build up an investment income of more than 70K? If I were chancellor I would reduce the cap to 300K and say if you're rich enough to save more you should do so without tax incentives. (Clarification: I'm not a lefty, I would use the tax subsidy avoided to reduce income tax.)

70K a year during their working life is more than 99.9% of people can dream of, let alone in retirement. I know Contractors may earn that much or more a year for a few years, but very few will earn it year-in year-out for 15-30 years that's comparable to a retirement period.

**ASB** · 30 March 2005, 09:35

Re: That cap

If you are not seeding it with a substantial lump, or do not already have a sizeable pot then you're probably going to be OK.

Overall pensions have only actually been tax neutral (because the end is taxable), but you arer right of course that the NI savings are going to be worthwhile.

Of course the effective tax rate on any funds over the cap is 73%, since there will also be 40% on the balance to pay as it is converted into an annuity.

Certainly I think pension planning will need much more careful monitoring in years to come since the tax payable is dependant upon the investment performance.

**rootsnall** · 30 March 2005, 09:51

Re: That cap

The other plus is that you won't have to buy an annuity if you are using a SIPP. You can 'drawdown' the amount you would get via an annuity ( plus a bit extra ) each year but leave the rest of your pot intact. So with a £300K pot at the moment you can take out £15-20K. Obviously you'll pay some tax but a lot less than paying it up front taking into account NI. If you snuff it your pot goes to your spouse or other next of kin. If you don't need the money at the time you can leave it in the pot. The attractiveness is reduced if you stay outside IR35 but I dont fancy our chances of doing this long term and also don't want to be sat on an ever increasing possible tax bill moving forward if the IR get me.

tax + NI issues post April 2006