Reversing pension mitigation follow LC review

[starstruck]

If you are one of the lucky ones who is now either partly or fully out of scope of the LC and who made pension contributions to mitigate the tax, you might find the following helpful:

• Your net relevant UK earnings will have reduced by the amount of loans now out of scope.
• The amount you are allowed to contribute to your pension may have reduced as a result as you can only pay gross up to your net relevant UK earnings.
• If you gross contribution has now exceeded your net relevant UK earnings it is fine - you can claim it back (or even leave it there, but you'll lose the 20% tax relief part which must be returned to gov).
• To get the money back its a simple form, where you just give your actual net relevant UK earnings for the year, your pension provider can post/email it to you, they then do the rest.
• Hargreaves Lansdown said they could refund very quickly, within a week or so.
• You need to have the cash there for the refund or they may force sell your holdings.
• Be careful when you divest! You want to minimise any investment losses and maximise any gains. Markets seem quite high at the moment.
• Provider must send money back to gov within 90 days of receiving the form, if they don't get in that time I believe you start to get charged interest.
• There was no mention of any interest other than that.
• Online it says you have 6 years to make the claim.
• 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.

Word of warning, LC changes are not law yet, so I personally think it is best to wait for the law change before getting the money out as then you are following the actual legal rules and not just HMRC guidance. Plus if these changes for some reason don't become law, you've not scuppered your mitigation. For tax returns, I think it is ok to put the proposed pension payment (i.e. after you've claimed back what you want to) even though the law has not changed, that way you'll get a correct calculation on your SATR, which can be amended later anyway as per HMRC guidance.

[DealorNoDeal]

Word of warning, LC changes are not law yet, so I personally think it is best to wait for the law change before getting the money out as then you are following the actual legal rules and not just HMRC guidance. Plus if these changes for some reason don't become law, you've not scuppered your mitigation. For tax returns, I think it is ok to put the proposed pension payment (i.e. after you've claimed back what you want to) even though the law has not changed, that way you'll get a correct calculation on your SATR, which can be amended later anyway as per HMRC guidance.

This, absolutely.

[starstruck]

Some more thoughts:

So timescales might go a little like this

1. Work out how much you are going to take back from your pension based on new relevant UK earnings
2. Put the adjusted figure on you SATR to get the correct calculations (this is just what I'm doing, I've not been given this as advice).
3. Work out when you want to divest into cash the necessary amount, e.g. over a period of time to reduce risk or all in one go when prices are good. Ultimately you need to have as cash what you are getting back and what gov are getting back - don't forget that second amount!
4. You need it ready as cash in your pension by the time the LC changes become law in the summer
5. Once law you can send your request to you pension provider and get your cash back.
6. Your carry forward allowance also gets re-instated as the old payment now never happened.

So as an example:

In 2018/19 you had salary of £10K and loans of £100K and you mitigated this entirely with a £110k gross contribution, i.e. you paid £88K into your pension personally and the gov topped up by £22K. You utilised some unused carry forward allowance to do this. LC changes now mean loans are out of scope. This means once law, you are only allowed to contribute gross £10K into your pension in 2018/19. You can't claim back the full £110K gross because of your salary but you can claim back the £100K gross loan part. So you divest £100k. Fill in the form and you get back £80K and the tax man gets back his £20k. £10K remains in the pot, £8k from you and £2k from the gov.

[Tiger22]

Some more thoughts:

So timescales might go a little like this

1. Work out how much you are going to take back from your pension based on new relevant UK earnings
2. Put the adjusted figure on you SATR to get the correct calculations (this is just what I'm doing, I've not been given this as advice).
3. Work out when you want to divest into cash the necessary amount, e.g. over a period of time to reduce risk or all in one go when prices are good. Ultimately you need to have as cash what you are getting back and what gov are getting back - don't forget that second amount!
4. You need it ready as cash in your pension by the time the LC changes become law in the summer
5. Once law you can send your request to you pension provider and get your cash back.
6. Your carry forward allowance also gets re-instated as the old payment now never happened.

So as an example:

In 2018/19 you had salary of £10K and loans of £100K and you mitigated this entirely with a £110k gross contribution, i.e. you paid £88K into your pension personally and the gov topped up by £22K. You utilised some unused carry forward allowance to do this. LC changes now mean loans are out of scope. This means once law, you are only allowed to contribute gross £10K into your pension in 2018/19. You can't claim back the full £110K gross because of your salary but you can claim back the £100K gross loan part. So you divest £100k. Fill in the form and you get back £80K and the tax man gets back his £20k. £10K remains in the pot, £8k from you and £2k from the gov.

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.

[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.

[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.

[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.

[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.

[CanPayButWouldRatherNot]

great post starstruck- now bookmarked

[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.