Reply to: There's a newer version of that Pension guide

[dammit chloe]

Thank you for pointing out me error - which is accepted and I apologise for.

You are correct.

Settling a closed year will not attract interest or penalty.

The loan charge will not have interest because it does not fall due until January 2020.

Employee NIC? Probably not.

Are you saying no Employee NIC on Loan Charge ( I have read yes and no on this before )?

If so is there going to be confirmation. Makes a difference to me as the nearer my settling and not settling costs are the more obvious the decision to do the latter.

[webberg]

Thank you for pointing out me error - which is accepted and I apologise for.

You are correct.

Settling a closed year will not attract interest or penalty.

The loan charge will not have interest because it does not fall due until January 2020.

Employee NIC? Probably not.

[1887wwfc]

I believe the poster said in an earlier post their years are closed so none of the above is applicable to them.

I did Starstruck and thanks for your reply earlier.

Basically with closed years I was just asking the question if you've requested settlement Via CLS02 and HMRC come back with a settlement figure (which I am hoping confirms no open years. interest or penalties) and I then calculate the Loan Charge is a few thousand cheaper in PAYE tax terms are there any other considerations, eg. do I have to pay employees NI as well? I was advised at the start that Settlement might be the easiest solution but I guess they didn't know all my circumstances, such as I only draw a small income currently, so I was just exploring which option would give be the best and cheapest, hence also the question about pension offsetting.

[starstruck]

The settlement will include interest. (We've not seen any with penalties).

Let's assume the following.

Open years 11/12 and 12/13. Loans of £50k in each year.

Tax liability on the loans in those years is £15k, in 11/12 and £13k in 12/13.

Tax liability under loan charge is £30k (mix of 20% and 40%).

You choose not to settle and pay the loan charge in January 2020.

Some time later, say January 2021, you finally agree 11/12 and 12/13. The liability is as above. Now that the years are settled, the interest can be calculated.

Ignoring minor changes in rates, interest from 11/12 is £15k x 3% x 7 (period from due date to date loan charge paid) = £3k.

Interest from 12/13 is £13k x 3% x 6 = £2,500.

(I'm rounding the numbers).

So, you owe £15k + £13k + £5.5k = £33.5k. You have paid £30k. You owe another £3.5k at that time.

(And before some pedant jumps on the above and quotes sections and guidance notes about how the legal process is different, I am happy that the EFFECT is as above.)

I believe the poster said in an earlier post their years are closed so none of the above is applicable to them.

[webberg]

I appreciate that.

What I am saying is that for me (assuming no penalties or interest in my settlement), if going the Loan Charge route works out far less than Settlement (as I have very little current income so loans mostly taxed @ 20%), can I just opt for that route and inform HMRC that I will pay the Loan charge and are there any consequences or differences to consider for choosing that over settlement via CLS02

The settlement will include interest. (We've not seen any with penalties).

Let's assume the following.

Open years 11/12 and 12/13. Loans of £50k in each year.

Tax liability on the loans in those years is £15k, in 11/12 and £13k in 12/13.

Tax liability under loan charge is £30k (mix of 20% and 40%).

You choose not to settle and pay the loan charge in January 2020.

Some time later, say January 2021, you finally agree 11/12 and 12/13. The liability is as above. Now that the years are settled, the interest can be calculated.

Ignoring minor changes in rates, interest from 11/12 is £15k x 3% x 7 (period from due date to date loan charge paid) = £3k.

Interest from 12/13 is £13k x 3% x 6 = £2,500.

(I'm rounding the numbers).

So, you owe £15k + £13k + £5.5k = £33.5k. You have paid £30k. You owe another £3.5k at that time.

(And before some pedant jumps on the above and quotes sections and guidance notes about how the legal process is different, I am happy that the EFFECT is as above.)

[1887wwfc]

If you are settling, then there is no loan charge and therefore no need to mitigate the charge with a pension contribution?

The loan charge IS NOT SETTLING.

If you have settled via the contract route, then no need to make a SA return.

I appreciate that.

What I am saying is that for me (assuming no penalties or interest in my settlement), if going the Loan Charge route works out far less than Settlement (as I have very little current income so loans mostly taxed @ 20%), can I just opt for that route and inform HMRC that I will pay the Loan charge and are there any consequences or differences to consider for choosing that over settlement via CLS02

[webberg]

I am assuming that if you don't get a settlement figure before 5th April then the opportunity to use the Pension offset against LC2019 is lost?

WTT submitted my calculations in July last year and I am still awaiting HMRC settlement pack.

Also, if you decide to "settle" via the loan charge rather than CLSO2 are their any other considerations as my years are closed and the tax owed by my calculations will work out less due to a small pension income only in 2018/2019. I understand a Self-Assessment will be required but wondered are the legal terms of settlement the same?

If you are settling, then there is no loan charge and therefore no need to mitigate the charge with a pension contribution?

The loan charge IS NOT SETTLING.

If you have settled via the contract route, then no need to make a SA return.

[passerby]

I am assuming that if you don't get a settlement figure before 5th April then the opportunity to use the Pension offset against LC2019 is lost?

That how i understand it. it is very annoying as we have to make the contribution before we know if we wiil be hit with the LC or not

Also, if you decide to "settle" via the loan charge rather than CLSO2 are their any other considerations as my years are closed and the tax owed by my calculations will work out less due to a small pension income only in 2018/2019. I understand a Self-Assessment will be required but wondered are the legal terms of settlement the same?

LC is not a settlement, it is a new tax. CLSO2 is settlement to avoid the LC. If you skip CLSO2 and pay the loan charge then that is the end of the story as all your years are closed.

[1887wwfc]

Settlement after 5th April

I am assuming that if you don't get a settlement figure before 5th April then the opportunity to use the Pension offset against LC2019 is lost?

WTT submitted my calculations in July last year and I am still awaiting HMRC settlement pack.

Also, if you decide to "settle" via the loan charge rather than CLSO2 are their any other considerations as my years are closed and the tax owed by my calculations will work out less due to a small pension income only in 2018/2019. I understand a Self-Assessment will be required but wondered are the legal terms of settlement the same?

[webberg]

Thanks for the clarification.

Can I ask what big issues though?

it is something I have looked into and if your contribution exceeds your relevant income, then you can withdraw it in the next 6 years. I have checked with my Sipp provided and they certainly agree, all they need is the tax return or P60.

You need to ask your SIPP provider whether an overpayment of a contribution will create a tax charge in that year.

You may well be able to withdraw the cash over the following years (beyond my knowledge), but usually overpayments are treated as creating a taxable liability.

[stonehenge]

Yes I do think HMRC will pursue enquiries because:

a. That is what the law requires

[passerby]

That might mean that the pension contribution is now in excess of what might be allowable and that can cause a lot of issues.

Thanks for the clarification.

Can I ask what big issues though?

it is something I have looked into and if your contribution exceeds your relevant income, then you can withdraw it in the next 6 years. I have checked with my Sipp provided and they certainly agree, all they need is the tax return or P60.

[webberg]

big risk?

You really think that HMRC are going to pursue open enquiries to a conclusion? Their track record over the past 20 years suggests otherwise.

The whole point of the LC is to clear up the legacy mess and draw a line under it.

I know someone who was in a (non loan) scheme around 2003. HMRC opened an enquiry but their "investigation" has never gone anywhere.

Yes I do think HMRC will pursue enquiries because:

a. That is what the law requires

b. The loan charge double tax relief provisions are written on that basis.

It is a dangerous fallacy to think that HMRC inaction means the enquiry is over or never started. If you get an enquiry, YOU can drive it forward and YOU have means at hand to force HMRC to pursue it or drop it.

The fact is that HMRC like to create the impression that enquiries can be driven only by them, whereas in fact it has always been the case that it's a two way street, it's just that most taxpayers have an irrational fear of HMRC and chose to not push.

However make no mistake.

The enquiries WILL NOT CEASE, regardless of whether the loan charge survives or not.

Something to consider if any are considering one of the many "solutions" to the loan charge.

[stonehenge]

I agree that you would be taking a big risk if you make pension contributions in respect of years that are still open.

big risk?

You really think that HMRC are going to pursue open enquiries to a conclusion? Their track record over the past 20 years suggests otherwise.

The whole point of the LC is to clear up the legacy mess and draw a line under it.

I know someone who was in a (non loan) scheme around 2003. HMRC opened an enquiry but their "investigation" has never gone anywhere.

[Iliketax]

Therefore if that open year is agreed later, the loan is removed from the loan charge and the amount taxed in 2018/19 will reduce.

That is not quite right. From a geeky perspective, the April 2019 loan charge employment income will never be removed. If we then assume that you (or the courts) agree that the open year's employment income should also be taxed then there are two lots of tax due on the same amount. The double tax relief rules recognise that by ensuring that the tax paid on the April 2019 loan charge will also count as paying the tax due on the open year. So basically the tax paid on the April 2019 counts twice (which is symmetrical with the same amount of money being taxed twice).

Then the scary bit. In a webinar specifically addressing the point, HMRC said that its view is that by claiming pension relief in 2018/19 you reduce the tax due in 2018/19 and so also reduce the tax that can also credit the open year's tax. So you are still left with a bill for the open year.

Using numbers:

No pension contributions

Loan charge £100: extra tax paid for 2018/19 (say) £40

2013/14 open year is now taxed and income was £100: extra tax to pay for 2013/14 is (say) £40.

You pay the £40 for 2018/19 in (say) January 2020 and it covers the tax bills for both 2018/19 and 2013/14. So no double tax.

With pension contributions

Loan charge £100: extra tax paid for 2018/19 would be (say) £40 but you pay £100 (gross) pension contribution so no extra tax.

2013/14 open year is now taxed and income was £100: extra tax to pay for 2013/14 is (say) £40.

You pay no tax for 2018/19. So HMRC say you still owe £40 for 2013/14.

I'm not clear that HMRC is right on that (especially if you have other income). But I would not suggest anyone makes pension contributions for open year loans without taking their own personal tax advice (as there is risk of having to make the pension contribution and pay the extra tax for the open year).

I think I would agree therefore that the pension contribution should be based on closed years being included in the loan charge and open years not.

I agree that you would be taking a big risk if you make pension contributions in respect of years that are still open.