Reply to: Guide to using pension contributions to mitigate LC19

[CanPayButWouldRatherNot]

so hands up who has used this ?

show of hands of who has used this to mitigate LC19 ?

[passerby]

but only on past closed years?

I'm guessing there's some small print, as this was the first thing i mentioned with my TA over the phone - and was told 'no it doesn't work'. I've asked again recently, still waiting on a reply.

this is valid if you go for the loan charge. (regardless of open or closed years)

there was a discussion earlier that if you pay the loan charge and you have open years that you settle later, then this will reduce your loan charge income. In this case you run the risk of contributing more than your income. (i understand this can be recovered however)

[webberg]

I'm assuming that the above was meant to say "2018/19" and not 2019/20?

Let's assume that your income in 2018/19 is £50,000. Your loans to be brought into account (assuming you agree with HMRC's version of the charge) is £100,000.

Your income in 2018/19 is £150,000.

You have no personal allowance as it is restricted on a 2 for 1 basis once income goes over £100k.

You will pay 20% on the first £34,500 and 40% on the next £115,500. Total tax £53,100.

Now let's assume you pay a pension fund £80,000 cash.

That is treated as a contribution of £100,000 as the fund will reclaim £20,000 from the Government.

Your liability to tax is as follows.

Income £150,000.

Less personal allowance (£11,850) because the point at which it starts to be limited (£100,000) is extended by adding in the gross pension contribution, to £200,000.

Taxable income £138,150.

You pay 20% on the first £134,500 and 40% on the next £15,500, total £33,100.

So your total cash outlay is £33,100 + £80,000 = £113,100.

Your pension is £100,000 better off.

[here4beer]

In simple terms, if you put 80k in your pension, hmrc will add 20k to the pension as well.

Your personal tax allowance will be increased by 100k (from roughly 12k to 112k)

this is what my accountant told me.

but only on past closed years?

I'm guessing there's some small print, as this was the first thing i mentioned with my TA over the phone - and was told 'no it doesn't work'. I've asked again recently, still waiting on a reply.

[passerby]

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?

In simple terms, if you put 80k in your pension, hmrc will add 20k to the pension as well.

Your personal tax allowance will be increased by 100k (from roughly 12k to 112k)

this is what my accountant told me.

[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?

[sst2019]

.......

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

[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

[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.

[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]

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.

[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.

[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?

[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)

[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.