Reply to: Reversing pension mitigation follow LC review

[Silverskin]

Thanks, appreciated

[starstruck]

Sorry just one other clarification, so the £50k would be gross (i.e. include the 20% government tax contribution) and therefore I would need to withdraw funds to the level where the contribution I have personally made is £40k (i.e. 80% of the gross amount). Is this understanding correct?

To expand on the specifics, originally I was expecting to be able to make a £120k gross pension contribution, receiving 45% tax relief. Therefore I made an original net contribution of £96k (with £24k [20%] coming from government) and I was expecting to claim a further 25% tax relief (£30k) on my SATR.

Now that I am no longer facing the Loan Charge my income has now reduced to £50k and as we've previously discussed, the pension contribution I must make is on a par with this income, i.e. £50k gross (£40k net). So by my reckoning, having paid £96k net initially, and now being obliged to contribute £40k net, then I personally need to withdraw £56k (aside of the £14k refund the government would be entitled to).

Is my understanding correct?

Cheers

Yep. If you're income is now 50k then you need to leave 50k gross in the pension; which is 40k from your pocket. You've paid £96k from your pocket so you can get back £56k which you overpaid. Plus the gov will get back the tax relief it gave you on that £56k also; that won't stay in your pension. So you're pension will be left with £50k in it and you'll get back £56k cash. That's how I understand it.

[Silverskin]

Yes you must keep the £50k gross in there, the reason being you are only allowed to unwind based on an over payment and not because you changed your mind (presumably, people would be at it all the time otherwise). So you'd get back a max of £56k (70*0.8) and the rest you'd get at retirement.

It might seem like a bit of a pain, but if you consider your total overall position following the changes, you're in a much better place and you had no way to predict these changes and if they hadn't happened the pension mitigation was a very wise decision.

Sorry just one other clarification, so the £50k would be gross (i.e. include the 20% government tax contribution) and therefore I would need to withdraw funds to the level where the contribution I have personally made is £40k (i.e. 80% of the gross amount). Is this understanding correct?

To expand on the specifics, originally I was expecting to be able to make a £120k gross pension contribution, receiving 45% tax relief. Therefore I made an original net contribution of £96k (with £24k [20%] coming from government) and I was expecting to claim a further 25% tax relief (£30k) on my SATR.

Now that I am no longer facing the Loan Charge my income has now reduced to £50k and as we've previously discussed, the pension contribution I must make is on a par with this income, i.e. £50k gross (£40k net). So by my reckoning, having paid £96k net initially, and now being obliged to contribute £40k net, then I personally need to withdraw £56k (aside of the £14k refund the government would be entitled to).

Is my understanding correct?

Cheers

[Silverskin]

I mentioned because I purchased global trackers mid last year and they are 10% higher now. I’m locking in that gain before the new law comes in. Hence I’m saying the global markets are high right now. if you’re planning on taking this money back in the summer they might be much higher still but they may also be much less. How much risk do you want to take? You don’t want to lose the tax rebate through investment losses.

I’ve not found any reference to gov wanting interest on the tax rebate that was in your pot. other than if pension company doesn’t pay them within 90 days of you completing form. But I agree, it seems odd they will let you invest their money for 6 years!! That could be quite some investment gains. So perhaps I’m missing something here. HL never mentioned interest.

Thanks for the reply, yes it does seem odd doesn't it so perhaps there's more to it.

[starstruck]

On a separate note, you alluded to the timing of the withdrawal in relation to minimising investment losses and maximise any gains. Is it that any losses or gains are carried by the individual? Is there any interest payable on the tax relief received for the period invested?

I mentioned because I purchased global trackers mid last year and they are 10% higher now. I’m locking in that gain before the new law comes in. Hence I’m saying the global markets are high right now. if you’re planning on taking this money back in the summer they might be much higher still but they may also be much less. How much risk do you want to take? You don’t want to lose the tax rebate through investment losses.

I’ve not found any reference to gov wanting interest on the tax rebate that was in your pot. other than if pension company doesn’t pay them within 90 days of you completing form. But I agree, it seems odd they will let you invest their money for 6 years!! That could be quite some investment gains. So perhaps I’m missing something here. HL never mentioned interest.

[Silverskin]

On a separate note, you alluded to the timing of the withdrawal in relation to minimising investment losses and maximise any gains. Is it that any losses or gains are carried by the individual? Is there any interest payable on the tax relief received for the period invested?

[Silverskin]

Correct on gross/net yes. But how can you amend your income for the 2018/19 year, it is not the accounts that matter, it's the actual payments that happened in the year that matter. The only scope I could see for change would be moving an amount between a director's loan and dividend or vice versa, I don't see how you can retrospectively change your salary.

No that's not correct although I'm waiting to hear the detail of what's permissible specifically.

[starstruck]

Thanks Tiger22, starstruck and CanPayButWouldRatherNot.

The main reason I'm asking is that I am still to file my business accounts for the 2018-19 tax year and therefore I have potential to amend the business return and therefore my income from the business for the 2018-19 tax year.

Because of the Loan Charge I had reduced all other income practically down to nil but now the Loan Charge won't hit me, my income is due to be nil and I won't be taking advantage of the nil and low rate income tax bands. Clearly however, given what's being said, whatever income I choose to now take from my business will need to bear in mind that the pension contribution will have to be at the same level.

Almost certainly a stupid question but presumably we're talking about gross amounts here? Following on from the previous example, if I take income at £50k then my gross pension contribution will be £50k, comprised of £40k contribution from me and £10k basic tax relief from the government. Correct?

Thanks in advance again.

Correct on gross/net yes. But how can you amend your income for the 2018/19 year, it is not the accounts that matter, it's the actual payments that happened in the year that matter. The only scope I could see for change would be moving an amount between a director's loan and dividend or vice versa, I don't see how you can retrospectively change your salary.

[Silverskin]

Yes you must keep the £50k gross in there, the reason being you are only allowed to unwind based on an over payment and not because you changed your mind (presumably, people would be at it all the time otherwise). So you'd get back a max of £56k (70*0.8) and the rest you'd get at retirement.

It might seem like a bit of a pain, but if you consider your total overall position following the changes, you're in a much better place and you had no way to predict these changes and if they hadn't happened the pension mitigation was a very wise decision.

Unfortunately whilst the Loan Charge changes are welcome I still have several open tax years to fight so the unfortunately it's just the angle of HMRC's attack that's changed for me.

[Silverskin]

Thanks Tiger22, starstruck and CanPayButWouldRatherNot.

The main reason I'm asking is that I am still to file my business accounts for the 2018-19 tax year and therefore I have potential to amend the business return and therefore my income from the business for the 2018-19 tax year.

Because of the Loan Charge I had reduced all other income practically down to nil but now the Loan Charge won't hit me, my income is due to be nil and I won't be taking advantage of the nil and low rate income tax bands. Clearly however, given what's being said, whatever income I choose to now take from my business will need to bear in mind that the pension contribution will have to be at the same level.

Almost certainly a stupid question but presumably we're talking about gross amounts here? Following on from the previous example, if I take income at £50k then my gross pension contribution will be £50k, comprised of £40k contribution from me and £10k basic tax relief from the government. Correct?

Thanks in advance again.

[CanPayButWouldRatherNot]

great post starstruck- now bookmarked

[starstruck]

"....You can only claim back the amount over your net relevant UK earnings, e.g. salary and taxable BIK amounts, so you'll almost certainly not be able to unwind the entire position...."

Thanks for this very useful post. With respect to the quote above, I just want to make sure I have this correct.

Example

Let's say that before the LC changes I was due to declare £250k income in the 2018-19 tax year made up of £200k from LC based loans and £50k from other earned income. Let's also say that I had made a pension contribution of £120k gross to help offset the tax liability.

After the LC changes my LC liability has now been reduced to nil (as all loans pre 2010) and as a consequence my 2018-19 SATR would therefore show only £50k income.

Are you saying that the maximum amount that I could withdraw from the pension contribution is £70k, i.e. that I would need to keep a minimum of £50k in the pension contribution as this is in line with the income earned for the tax year?

Thanks in advance.

Yes you must keep the £50k gross in there, the reason being you are only allowed to unwind based on an over payment and not because you changed your mind (presumably, people would be at it all the time otherwise). So you'd get back a max of £56k (70*0.8) and the rest you'd get at retirement.

It might seem like a bit of a pain, but if you consider your total overall position following the changes, you're in a much better place and you had no way to predict these changes and if they hadn't happened the pension mitigation was a very wise decision.

[Tiger22]

"....You can only claim back the amount over your net relevant UK earnings, e.g. salary and taxable BIK amounts, so you'll almost certainly not be able to unwind the entire position...."

Thanks for this very useful post. With respect to the quote above, I just want to make sure I have this correct.

Example

Let's say that before the LC changes I was due to declare £250k income in the 2018-19 tax year made up of £200k from LC based loans and £50k from other earned income. Let's also say that I had made a pension contribution of £120k gross to help offset the tax liability.

After the LC changes my LC liability has now been reduced to nil (as all loans pre 2010) and as a consequence my 2018-19 SATR would therefore show only £50k income.

Are you saying that the maximum amount that I could withdraw from the pension contribution is £70k, i.e. that I would need to keep a minimum of £50k in the pension contribution as this is in line with the income earned for the tax year?

Thanks in advance.

Correct, you would need to leave the £50k in the pension because you had relevant earnings for that amount. If you tried to take the remaining £50k out then HMRC would charge a penalising tax on it, as they would with anyone who tries to access their pension funds early.

[Silverskin]

"....You can only claim back the amount over your net relevant UK earnings, e.g. salary and taxable BIK amounts, so you'll almost certainly not be able to unwind the entire position...."

Thanks for this very useful post. With respect to the quote above, I just want to make sure I have this correct.

Example

Let's say that before the LC changes I was due to declare £250k income in the 2018-19 tax year made up of £200k from LC based loans and £50k from other earned income. Let's also say that I had made a pension contribution of £120k gross to help offset the tax liability.

After the LC changes my LC liability has now been reduced to nil (as all loans pre 2010) and as a consequence my 2018-19 SATR would therefore show only £50k income.

Are you saying that the maximum amount that I could withdraw from the pension contribution is £70k, i.e. that I would need to keep a minimum of £50k in the pension contribution as this is in line with the income earned for the tax year?

Thanks in advance.

[starstruck]

Do HMRC get their contributions back directly from the pension company though? Have you confirmed that?

I expected, as part of my SATR due end of January, to have to pay to HMRC their contribution to the pension (in my case £16,000 which topped up my £64,000 contribution). Then, following the revision to the LC legislation, I expected to claim the full amount, including the HMRC contribution, back directly from the pension provider.

How do I fill out my SATR so this 16k payment (i.e. the HMRC contribution) is no no longer due ? Is this even allowed?

I see HMRC taking a dim view of not getting their contribution back via the SATR and having to wait until some point in the future (I think you have up to 5 years to make a claim) when the pension company pays it back.

Yes, it works as I have described. People over pay all the time by mistake. It gets resolved by the pension companies.

Maybe this will reassure you, it's an email from Hargreaves Lansdown.

Thanks for telling us you may have over-contributed to your SIPP.

If you've made personal pension contributions in excess of your Relevant UK Earnings (RUKEs), you'll have received tax relief to which you aren't entitled. This will need to be returned.

To tell us you've made excess SIPP contributions, please complete the form available via the link below. On receipt we'll return the excess basic rate tax relief to HMRC. If you've claimed any further tax relief, you'll need to settle this directly with HMRC.

We must repay the basic rate tax relief within 90 days of receiving your declaration. If necessary, we'll sell investments to cover the amount due and postal dealing charges will apply. If you'd prefer to sell your investments online, please do so before returning this form.

>>> Download the SIPP Excess Contribution Declaration

Please complete part A of the declaration in all cases. You then have three options for what to do with the net excess contribution:

1. Leave the net excess contribution in the pension as a gross contribution for the tax year in which it was made. To do this, please sign, date and return the form leaving part B blank.
2. Have the excess contribution refunded to you. To do this, please complete part B (i) of the form and sign, date and return it to us.
3. Have the excess amount removed from the SIPP and then immediately re-contributed as a net tax-relievable contribution for the current tax year, subject to your eligibility. To request this, please complete part B (ii) of the form and sign, date and return it to us.

For options 2 and 3, you should ensure there's enough cash available in your SIPP. Option 3 isn't available if you're returning the form in the same tax year that the excess contribution was made.

Please be aware that it isn't possible to request a refund if your contributions are within 100% of your earnings, even if you're liable to an annual allowance tax charge.

Once you have completed the form, please return this to our Bristol address of One College Square South, Anchor Road, Bristol, BS1 5HL. Alternatively, our freepost address is 'Freepost: HARGREAVES LANSDOWN' (no stamp required). Please be aware that freepost can occasionally take longer than regular post.

If you have any other questions, please get back to me.

Follow the link and there's a Q&A section. This link explains you have 6 years to claim:

Refunding excess personal contributions FAQ

Any refund must be made within 6 years beginning on the last day of the tax year in which the excess contributions were made.