Guide to using pension contributions to mitigate LC19

[Iliketax]

Why no open years?

This is where me and HMRC have different views. HMRC said in a webinar a while ago (I think that there is probably a link on here somewhere) that it would give problems with the double tax relief (s554Z11B+). So if you were planning on doing this, you'd want to take your own personal advice based on your own circumstances and your own risk appetite.

[CanPayButWouldRatherNot]

This is where me and HMRC have different views. HMRC said in a webinar a while ago (I think that there is probably a link on here somewhere) that it would give problems with the double tax relief (s554Z11B+). So if you were planning on doing this, you'd want to take your own personal advice based on your own circumstances and your own risk appetite.

As someone with one open year and one closed year

Can I go ahead with this for my closed year (and so hedge half my risk)

[sst2019]

I would be most grateful for advise regarding this?
I worked additional hours as a locum doctor, with loans totalling 15000 & been offered 5000 settlement.
Currently enrolled in an NHS pension.
The umbrella company also set up a pension with the peoples pension, suspect is private pension.
My salary is gross £64000 minus pension contribution of £4400 p.a., and the remainder of which is taxable.
Could i therefore instead of settling rather put funds into a pension?

I have tried applying the worked example in my case but the loan amount is 15000 & already paying into a pension, cannot seem to work out the calculation including using w ww.uktaxcalculators.co.uk

I would be grateful for advice?

[INeedHelp]

Hi, I presume that one could use VCT's or EIS's in the same way

I've knocked up a PDF which covers pension contributions and a few other things.

Download here:

Download LC19 - Pension Contributions v2.pdf | Files.com

Let me know if I've got anything plain wrong, made any errors or if you have any comments.

[starstruck]

I would be most grateful for advise regarding this?
I worked additional hours as a locum doctor, with loans totalling 15000 & been offered 5000 settlement.
Currently enrolled in an NHS pension.
The umbrella company also set up a pension with the peoples pension, suspect is private pension.
My salary is gross £64000 minus pension contribution of £4400 p.a., and the remainder of which is taxable.
Could i therefore instead of settling rather put funds into a pension?

I have tried applying the worked example in my case but the loan amount is 15000 & already paying into a pension, cannot seem to work out the calculation including using w ww.uktaxcalculators.co.uk

I would be grateful for advice?

So your total income for year will be salary + loans = 64K+15K = £79K. No taper or reduced allowances apply because total < £110K. You can contribute up to £40K into pension. You are already doing £4.4K. If you do an additional £15K personal contribution, this will have the effect that the tax you would pay on your loans (tax on £15k caused by Loan Charge) would end up in your pension (via tax relief). So you still pay the tax but get it back into your pension. Remember the loans have never been taxed to date so it becomes exactly like a company contribution, albeit it has come from your personal bank account.

[sst2019]

So your total income for year will be salary + loans = 64K+15K = £79K. No taper or reduced allowances apply because total < £110K. You can contribute up to £40K into pension. You are already doing £4.4K. If you do an additional £15K personal contribution, this will have the effect that the tax you would pay on your loans (tax on £15k caused by Loan Charge) would end up in your pension (via tax relief). So you still pay the tax but get it back into your pension. Remember the loans have never been taxed to date so it becomes exactly like a company contribution, albeit it has come from your personal bank account.

Dear Starstruck,

Many thanks for your reply.
Apologies, just to clarify I would need to acquire an additional 15K, therefore mitigating the LC2019?
Therefore would I still pay the 5K tax (as well as 15K = 20K, and how would I get it back)?

KR

sst2019

[starstruck]

Dear Starstruck,

Many thanks for your reply.
Apologies, just to clarify I would need to acquire an additional 15K, therefore mitigating the LC2019?
Therefore would I still pay the 5K tax (as well as 15K = 20K, and how would I get it back)?

KR

sst2019

Sorry I don't follow what you are asking above.

If there was no LC you earnings would be £64K which is £13,960 in tax (plugin 64K into UK Tax Calculator 2019 - Updated for the 2018/2019 and 2019/2020 Tax Year)
But the LC adds you loans as income so your earnings are now 64K+15K loans = £79K
So you now have an additional amount of tax to pay = 40% of 15K = £6K extra tax due to LC.
So your tax bill would be £19,960.

But if you put £12K into a pension from your personal account - the government will top it up to £15K (tax relief - done automatically by pension provider). Plus on self assessment your pension payment will extend your lower rate band so your 40% tax bill is reduced. So the £79k would be taxed as follows - 11,850 tax free then pay 6,900 lower rate tax (on 34,500), then 3,000 tax due to lower rate extension (on 15K) (extended due to pension payment) then 7,060 higher rate tax (on 17,650) = total £16,960 tax.

So you have reduced your tax bill by £3k and your pension has gained £3K. Which mitigates the extra £6k Loan Charge tax. But you may have to pay tax on the £3k when it comes out of your pension.

[CanPayButWouldRatherNot]

Hi, I presume that one could use VCT's or EIS's in the same way

yes this was confirmed with Loan Ranger a while back

[sst2019]

.......

Dear Starstruck, thank you for breaking that down for me. Very much appreciated. Kind regards

[ChimpMaster]

Guys can someone help me to understand how a pension contribution could reduce my LC liability.

I have an old pension running but haven't contributed to it for 15 years or so. It's a managed fund pension and they send me statements every year. Not a lot in it - it was my old permie pension.

I'm estimating my LC will be in the region of £100k. I will be a 40% tax rate payer in 2019/20.

If in 2019/20 I put the max £110k into this pension, how will this impact my LC liability and my overall tax position?