Pension contributions can be used to relieve LC19

[starstruck]

So one thing that confuses me about this.

Lets say in 2018/19 you earn £10K, get £30k dividends and have £100k of loans to declare.

Let's say you can scrape together £80k to pay into your pension and can carry forward £70k from previous years to allow this.

So you pay yourself £10k salary from Ltd, £30K divs from Ltd and £80k from personal account to pension - but this is not allowed as you must earn as least as much in the tax year as you wish to contribute and you have not earnt £80k only £10k (so "normally" you could contribute a max of £10k).

So the argument is that the LC counts as income allowing the extra pension contribution but what I don't get is that presumably just declaring the loans does not make it income yet - HMRC have to transfer debt to you etc.. presumably that takes time and in theory tax might come from employer not you. Are you able to pay into a pension based on what you think your PAYE bill will be before it's actually calculated/demanded?

[Loan Ranger]

LC19 is treated as earnings in 2018/19. I assume the loans will have to be declared on the self-assessment return by 31st Jan 2020.

Anyone contemplating making pension contributions should probably seek individual professional advice.

[starstruck]

So one thing that confuses me about this.

Lets say in 2018/19 you earn £10K, get £30k dividends and have £100k of loans to declare.

Let's say you can scrape together £80k to pay into your pension and can carry forward £70k from previous years to allow this.

So you pay yourself £10k salary from Ltd, £30K divs from Ltd and £80k from personal account to pension - but this is not allowed as you must earn as least as much in the tax year as you wish to contribute and you have not earnt £80k only £10k (so "normally" you could contribute a max of £10k).

So the argument is that the LC counts as income allowing the extra pension contribution but what I don't get is that presumably just declaring the loans does not make it income yet - HMRC have to transfer debt to you etc.. presumably that takes time and in theory tax might come from employer not you. Are you able to pay into a pension based on what you think your PAYE bill will be before it's actually calculated/demanded?

ILikeTax - would you be able to explain the above pls, I can't get my head around it. I know you're not a pensions expert but I think I am missing something basic here.

[Iliketax]

So the argument is that the LC counts as income allowing the extra pension contribution but what I don't get is that presumably just declaring the loans does not make it income yet - HMRC have to transfer debt to you etc.. presumably that takes time and in theory tax might come from employer not you. Are you able to pay into a pension based on what you think your PAYE bill will be before it's actually calculated/demanded?

Assuming:

(i) you don't settle beforehand, don't try to trigger an earlier tax charge, etc so that none of the double tax relief rules apply, and
(ii) none of the three deferrals applies (none will apply to a typical contractor loan)

It's income on 5 April 2019 because the loan is 'outstanding' on 5 April 2019. Who pays the tax on the April 2019 loan charge (or when it is actually paid) does not change the amount of income or when it arises.

So you have to pay the pension contribution before any tax is due (whether PAYE or self-assessment) and before you report it to HMRC. If you don't the pension contribution will be made in the wrong year.

If double tax relief (or one of the deferrals) might be relevant, take independent professional advice. And you'd probably want to take independent professional advice anyway.

[webberg]

Can I ask a question?

Let's assume that you have loans over the years 11/12 and 12/13 of £70k for each year.

Those loans fall into the DR charge in due course and your income in that year (18/19) is say £20k without the charge. (Probable as a result of managing the position)

Your relevant earnings are therefore £(2 x 70) + 20 = £160k.

At that level, there is a tapering of available relief for a pension contribution, but not much.

So you pay a premium of say £60k.

Some time in 2020 or beyond, you eventually reach agreement with HMRC over the position for 11/12 and 12/13. Let's say that you agree that the loans should be taxed in those years, which is after all, what HMRC want.

Your cash reserves are therefore used to pay the tax for 11/12 and 12/13.

Your 18/19 tax position is adjusted to remove the DR charge and the pension contribution is now in excess of taxable income.

What is the outcome here?

[Iliketax]

Can I ask a question?

Sure

Your 18/19 tax position is adjusted to remove the DR charge and the pension contribution is now in excess of taxable income.

Why do you think that is the case? Specifically, what piece of legislation requires that?

[ConfusedEasily]

Sure



Why do you think that is the case? Specifically, what piece of legislation requires that?

Because if you settle it relates to the years in question so you pay tax against income in those years.

Say I owe a LC based on 40K loans/income. The LC applies to one year. So, if I throw 40K at a pension and earn nothing else in the LC year then whoppee!

Then I decide to settle because life is too short. I pay the tax on 40k for 2001 (whatever) and then HMRC tell me that in the LC year I didn't earn anything so how could I possibly have put 40K in a pension.

Would it be fair to say that the tax system in this country is a bit crap?

[Iliketax]

Because if you settle it relates to the years in question so you pay tax against income in those years.

Say I owe a LC based on 40K loans/income. The LC applies to one year. So, if I throw 40K at a pension and earn nothing else in the LC year then whoppee!

Then I decide to settle because life is too short. I pay the tax on 40k for 2001 (whatever) and then HMRC tell me that in the LC year I didn't earn anything so how could I possibly have put 40K in a pension.

I understand your concern. But webberg needs to explain why he thinks that. Don't forget we are not talking common sense here, we are talking tax.

Would it be fair to say that the tax system in this country is a bit crap?

Yep.

[Loan Ranger]

Going down the LC/pension route assumes that's the end of the matter. The enquiries into your tax returns remain open but HMRC takes no further action.

Is there a risk that HMRC doesn't let it drop after you've paid the LC? Sure, but what's the likelihood of that?

I'm pretty sure, for HMRC, the LC is a line in the sand. It brings this whole sorry mess to an end.

[webberg]

Sure



Why do you think that is the case? Specifically, what piece of legislation requires that?

Does not 554Z5 say that where a liability on the sum has become due in an earlier period, then the loan value is removed from the DR charge?