Pension contributions can be used to relieve LC19

[starstruck]

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.

Am re-reading this thread carefully ... am I right in thinking you must make pension contribution AFTER 6th April 2018 and BEFORE 5th April 2019.

[jbeer]

So is this correct?

Salary = 10K
Loans = 100K
Pension Paid = 80K (assuming can carry forward 100K Gross)
Pension in Pot = 100K (tax relief added by provider)
Taxable Income = 10K

Not correct. See previous posting on 20 Feb.

[phil@pmtc]

As jbeer previously explained (and the earlier calculation tool shows) the pension contribution increases the basic rate threshold.

[Cyclonic]

How would this scenario work out for loan charge liability?

Lets say I have 250k of loans.

I settle 100k of open years via CLSO2 and leave 150k of closed years to the loan charge.

I have 50k of PAYE salary in 18/19 so my total income including unsettled loans is 200k

I contribute 80k to my pension, giving a total of 100k into the fund once grossed up?

That leaves 50k of loan income subject to the DR charge?

As I've already paid tax on my 50k PAYE salary and the next 100k is offset by my pension contribution, what rate will the remaining 50k be taxed at, 40% or 45%, and can I claim any more pension relief on the higher rate tax paid (there will already have been higher rate tax on the PAYE salary)

[starstruck]

As jbeer previously explained (and the earlier calculation tool shows) the pension contribution increases the basic rate threshold.

Ok, so is it this?

Salary = 10K
Loans = 100K
Dividends = 30k

Pension Paid = 80K (assuming can carry forward 100K Gross)
Pension in Pot = 100K (tax relief added by provider)

Income = 110K + 30K Dividends
~10K covered by Personal Allowance
100k loans at Basic Rate of 20% (because pension increases basic rate band) = 20K tax
5k dividend allowance
Remaining 25K dividends at basic dividend rate (because pension increases basic rate band) = 23*0.075 = 1.875K tax

Total Tax = 21.875k
(as opposed to 45K if no pension payments made)

That seems to fit with the Crunch calculation.
So the pension payments just keep everything at lower rather than higher rate?

[Loan Ranger]

Maybe what confuses the issue is the pension provider claiming the 20% tax relief.

Imagine if they didn't. (Apparently, not all providers do.)

Let's say you had loans of £100k.
You pay £100k into the pension.
You have no other income.

In that case, you'd pay no tax. Right?

[luxCon]

jbeer, Can you explain further?

You can't reduce your tax bill to zero (or 3.6K in webberg scenario) right ?

Pension contributions just increase the threshold at which higher rate tax kicks in.

So if you are making a 120K pension contribution you actually only pay in 80% of that - 96K and its automatically topped up to 120K. You then pay 20% tax on the 150K (-12K PA) = 27.6K.

So there will always be tax to pay at 20% unless you earn <= 12K for the year.

Jbeer , I would appreciate you either explain further or point me to some published example.

Say I make a £50k contribution to my SIPP. Government makes a 20% contribution of 10K. Say I have a 120k LC, does that not reduce my tax liability on the LC to 70K?

[starstruck]

Maybe what confuses the issue is the pension provider claiming the 20% tax relief.

Imagine if they didn't. (Apparently, not all providers do.)

Let's say you had loans of £100k.
You pay £100k into the pension.
You have no other income.

In that case, you'd pay no tax. Right?

Don't think so - crunch calculator says 40K income 40k pension = 5.7k tax
(40k income -11.5k alllowance taxed at 20%)

So I assume 100k income, 100k pension = aprox. 20k tax

[Finalwhistle]

I think the answer to the question the thread is asking is "yes". But its highly unlikely to reduce the DR LC to below your CLSO settlement value so why bother?

[Loan Ranger]

Don't think so - crunch calculator says 40K income 40k pension = 5.7k tax
(40k income -11.5k alllowance taxed at 20%)

So I assume 100k income, 100k pension = aprox. 20k tax

Try this calculator.

https://www.uktaxcalculators.co.uk

Put in £40,000 income. Pension £0. Note the tax due is £5,700.

Next put in £28,500 pension. Tax due is £0. (pension relief is £5,700)