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Guide to using pension contributions to mitigate LC19

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    #51
    Originally posted by ChimpMaster View Post
    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.

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      #52
      Originally posted by passerby View Post
      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.
      Last edited by here4beer; 21 March 2019, 10:58.

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        #53
        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.
        Best Forum Adviser & Forum Personality of the Year 2018.

        (No, me neither).

        Comment


          #54
          Originally posted by here4beer View Post
          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)

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            #55
            so hands up who has used this ?

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

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