The Pension Loophole article discussion

Zelazny

My Dad was looking into this - he has no job but does have pension income already (and is a basic rate taxpayer as a result).

Would this mean that he can still put in the £2,880 but that he'd have to pay basic rate tax on the non-tax-free part of the outcome?

So it would be:
In
Deposit: £2,880
Top up: £720
Total: £3,600

Out
tax free: £900
taxable @ 20%: £2,700
Tax to pay: -£540
Total: £3,060

Potential profit: £180

Given the need to invest almost £3k in this, and the return is only £180 less fees - is it likely to be at all worthwhile?

PAUL5ALLEN

Interesting article, is it legal? is it moral?
No its stupid!
As they often say the devil is in the detail and in this case the devil is old NIC himself (National Insurance Contribution). Every £1000 of earnings (once you are above the NIC threshold) you pay 20% tax and 12% NI so you see £680! Gee wiz you get your 20% tax back on pension contributions but no one ever mentions the devil.
Net of ALL tax's (that's all NIC is a tax by another name) Martins latest tip will leave you out of pocket!!
Think about it

dunstonh

PAUL5ALLEN wrote: »

Interesting article, is it legal? is it moral?
No its stupid!
As they often say the devil is in the detail and in this case the devil is old NIC himself (National Insurance Contribution). Every £1000 of earnings (once you are above the NIC threshold) you pay 20% tax and 12% NI so you see £680! Gee wiz you get your 20% tax back on pension contributions but no one ever mentions the devil.
Net of ALL tax's (that's all NIC is a tax by another name) Martins latest tip will leave you out of pocket!!
Think about it

pension income is not subject to National Insurance.

jamesd

PAUL5ALLEN wrote: »

As they often say the devil is in the detail and in this case the devil is old NIC himself (National Insurance Contribution). Every £1000 of earnings (once you are above the NIC threshold) you pay 20% tax and 12% NI so you see £680!

When do you think the National Insurance contributions are paid? You're wrong, I'm just trying to find out from you where you're getting it wrong.

Take £8,000 of after income tax and NI money. Pay it into a pension and get 25% added for basic rate tax relief to take it to £10,000. Withdraw it at basic rate and you receive £2,500 as a tax free lump sum and £7,500 before income tax, £6,000 after. Pension income isn't subject to NI even though it's done through PAYE so there's no NI on this. You now have £8,500 instead of the £8,000 that you started with.

Money_Saving_Forever

Complete noob here.. so let me get this straight.. for example I pay an online SIPP £8k (I am assuming I can do this in one hit?).. 4-6 weeks later that online provider will top up that account with a further £2k (courtesy of the gov).. two days later that account is being shut down with £8.5 withdrawal? Mucho gracias

jamesd

Correct. There will be some charges but not enough to consume the whole £500.

You also need to have at least as much in earned income as the total paid into all pensions in one tax year. So a person on £20,000 a year could use this only up to £20,0000 gross paid into the pensions, so two at £8,000 after tax pay each.

taylornj

jamesd wrote: »

When do you think the National Insurance contributions are paid? You're wrong, I'm just trying to find out from you where you're getting it wrong.

Take £8,000 of after income tax and NI money. Pay it into a pension and get 25% added for basic rate tax relief to take it to £10,000. Withdraw it at basic rate and you receive £2,500 as a tax free lump sum and £7,500 before income tax, £6,000 after. Pension income isn't subject to NI even though it's done through PAYE so there's no NI on this. You now have £8,500 instead of the £8,000 that you started with.

Think he is talking about the employer making gross contributions to a pension for a reduction of gross pay, rather than paying contribution from nett pay.

Medosh

:question:Martins's article is clear on most things and there are good points added here by posters, but what appears to have been left out, for tax novices is the impact of contributions to Trivial Pensions, or to Trivial plus all other pensions, in this tax year, in respect of the tax rates.
For example, a person earning a total of £45k, who contributes a total of £5k to pensions (any combination of occupational, AVC and personal) will safely drop below the higher tax threshold of £41k and pay tax only at the standard 20%, right?
Crucially, will this person, on contributing £30k to Trivial Pension, and now receiving a total income of £45 + £22.5 (the taxed 75% of their Trivial payout) now have to pay any tax at 40%? In particular, will their new £30k Trivial contribution, plus their other £5k pension contribution, safely reduce their 'Taxable' income to £67.5 - £35, or £32.5k for the tax year?

jamesd

With today's £41,450 higher rate transition point the £5,000 would have £4,550 with higher rate relief and £450 with basic rate.

The small pot lump sum would be added to that remaining taxable income and it would in turn be partly taxed at basic rate and partly at higher rate, though the 25% would escape that.

The result is a bit of a tax rate gain overall, since some of the income becomes untaxed.

Medosh

Thanks jamesd. You appear to confirm that there is no tax relief at the higher rate granted for contributions to the Trivial pensions. is that a correct reading on my part? thanks