Should I defer my DB pension?

Dazed_and_confused

Jamesd

Just realised you answered correct to op's opening assumption, are you sure he is going to be able avoid paying tax on the £15000?

Linton

Dazed_and_confused wrote: »

You might want to consider a new accountant.

Payments into a personal pension will entitle you to tax relief at source, for example if you made a pension contribution of £15000 you would get £3750 added to your pension fund (the pension company obtains this from HMRC) so your pension fund would contain £18750 at a cost to you of £15000.

This would have absolutely no bearing on the tax due on the £15000 received from your employer though. Depending on what other income you have in the year the £15000 is paid you the tax due on the £15000 will be anywhere from £700 upwards.

If the £15000 puts you into the higher rate tax bracket you may be due some further tax relief on the pension payment but this doesn't alter the fact that the £15000 is still taxable income.

Lets simplify things a bit...

Assuming a £45K payout, £30K of which is tax free, the OP should put £12K (£15K*0.8) into a private pension. HMRC will refund the missing £3K basic rate tax into the pension. If the OP is a higher rate tax payer HMRC will in addition refund any higher rate tax paid back to the OP.

The accountant was right to say that £15K should be added to the pension but wrong to imply that the OP themselves should directly pay all of that out of taxed income.

Camster

jamesd, thank you for your detailed reply to my post.

Could you please clarify a couple of the points that I don't have correct?

1. I could also use the carry forward rule to put more into my new pension for the current tax year and the three previous tax years, and would receive tax top ups from HMRC into the pension fund at my normal tax rate of 20%.

Correct but only up to your qualifying income this tax year. You can carry forward unused annual allowance but not income.

Sorry if I'm being a bit dense here, but I'm not sure if I understand what this means. I was thinking that if I had unused allowances from previous years, I could use savings I had to make additional payments up to the amount of my unused allowance for this year and the last three years into a new personal pension and this would get HMRC tax relief. I thought this would be equivalent to me doing this over the last four years of working, but I was just doing it all at the same time before my employment ended in early May.

2. If I estimated my unused allowance of £40,000 for the current year and the previous three years as £32,000 a year, I could put in £128,000 (4 x £32,000) and would get a 20% contribution from HMRC of £25,600, giving a total pension pot of £153,600. I could then take a 25% on off tax free withdrawal of £38,400, leaving a pension pot of £115,200.

Not quite right. It would be £160,000 because you add 25% to give 20% basic rate relief, but you're right about carry forward amounts and how to calculate the others. But you would need at least £128,000 of qualifying income this tax year.

My gross income this year is £44,400 and my pension contribution plus my employers contribution comes to around £7,500, so I would have about £36,900in unused allowance for this year to put in to a new pension fund. Again as in point 1 above, I thought I could do the same calculation for the three previous years and put that amount into the pension fund from my savings and I would receive the HMRC top up on these amounts.

I don't have £128,000 of income for this tax year, so I'm not sure how I work out how much I can put into the new pension to use up my unused allowance from previous years?

Andy_L

What is the reduction for taking the pension 2 years early? Is there an option to use the redundancy package to buy off that reduction?

Camster

I have been told by my employer that they will pay me the £30,000 tax free lump sum and will deduct the tax due on the additional £15,000 part of the redundancy payment at source, and pay the balance to me.

The advice I was given was to arrange to pay the £15,000 into a new personal pension plan and that that by doing this, no tax would be due on this additional amount.

It was only a brief email I had from my accountant, not a detailed discussion.

Camster

Andy_L wrote: »

What is the reduction for taking the pension 2 years early? Is there an option to use the redundancy package to buy off that reduction?

I would be taking the pension 18 months early and my understanding is that there is a 6% reduction for each year that the pension is taken early. As far as I know 5-6% reductions for early payment is a fairly standard amount.

I've checked the scheme handbook, and there is no mention of any facility to buy off the reduction, so I don't think this would be possible.

Dazed_and_confused

Linton

The op said the pension payment would mean there was no tax due which is wrong.

We now know op is earning £44k so depending on when in "the next few months" the £15000 is paid there will definitely be basic rate, quite possibly higher rate tax due on that payment however as you rightly say the op may be able to reduce any higher rate tax due by making the pension payment (and claiming higher rate relief from HMRC themselves)


Whichever way you look at it though there will still be tax to pay on the £15000

Linton

Dazed_and_confused wrote: »

Linton

The op said the pension payment would mean there was no tax due which is wrong.

We now know op is earning £44k so depending on when in "the next few months" the £15000 is paid there will definitely be basic rate, quite possibly higher rate tax due on that payment however as you rightly say the op may be able to reduce any higher rate tax due by making the pension payment (and claiming higher rate relief from HMRC themselves)


Whichever way you look at it though there will still be tax to pay on the £15000

The employer will deduct the tax but all the basic rate tax will be repaid into the OPs pension and for the higher rate part, if any, refunded to the OP directly. So the net effect is that getting £15K into the pension removes all the tax that was originally imposed, exactly the same as if the tax was not taken in the first place.

Camster

Linton wrote: »

Lets simplify things a bit...

Assuming a £45K payout, £30K of which is tax free, the OP should put £12K (£15K*0.8) into a private pension. HMRC will refund the missing £3K basic rate tax into the pension. If the OP is a higher rate tax payer HMRC will in addition refund any higher rate tax paid back to the OP.

The accountant was right to say that £15K should be added to the pension but wrong to imply that the OP themselves should directly pay all of that out of taxed income.

I'm leaving my employment in early May, so I will be a basic rate taxpayer. From what you have said in your post, I will get 20% tax on the £15,000 deducted by my employer, but if I put the remaining £12,000 into a personal pension, HMRC will top that up by £3,000, so by doing this, effectively I won't have paid any tax on the £15,000.

Linton

Camster wrote: »

I'm leaving my employment in early May, so I will be a basic rate taxpayer. From what you have said in your post, I will get 20% tax on the £15,000 deducted by my employer, but if I put the remaining £12,000 into a personal pension, HMRC will top that up by £3,000, so by doing this, effectively I won't have paid any tax on the £15,000.

Correct!!!!