AVC's and lump sum withdrawal - can it be done

TOPSie

Of course it is more complicated but just to keep it simple here is the nub of the issue.
I am employed and earn £60,000 per year. My company and I pay into a pension. The Pension currently has £44,000 in the pot. There is an option to take a 25% tax free lump sum from the pension.

As you can see I pay tax at 40%. But for the next tax year the upper band (40%) starts at £50,000. (say)

So here's the plan. I start making AVC's to the value of £11,000 through the year, to bring me under the 40% band and I withdraw £11,000 from the pension. So for the year I make a small gain by reducing my tax.

(as I say it isn't that simple - and the numbers are actually different - and the reason I am doing it is not just to make a marginal gain - but in essence this is what I am doing.
I have just been informed that HMRC have spotted this trick and it is not allowed !!

Can anyone confirm this - preferably given in chapter and verse - or at least the official "name" of this trick so I can do more research.

Many thanks

AlanP_2

I assume the 11k would be taken as a tax free lump sum?

Lump Sum Recycling rules will apply, there is a current thread discussing it.

TOPSie

The following (official) link tells all - my scheme cannot be done without incurring the wrath of HMRC :-(


https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810

Durban

Thanks for this Topsie
The link you provided appears to answer my question on my own recycling thread that I can do what I wanted to!

Brynsam

Just been informed by whom - someone who knows what they're talking about? And who is clued up on the MPAA which will limit you to contributions of £4,000 a year (including employer contributions) once you draw more than 25% of your pension pot (which you'll do pretty quickly if it is only valued at £44K now and you are doing this year on year).

I assume you are already aged at least 55?

Marcon

TOPSie wrote: »

So here's the plan. I start making AVC's to the value of £11,000 through the year, to bring me under the 40% band and I withdraw £11,000 from the pension. So for the year I make a small gain by reducing my tax.

(as I say it isn't that simple - and the numbers are actually different - and the reason I am doing it is not just to make a marginal gain - but in essence this is what I am doing.
I have just been informed that HMRC have spotted this trick and it is not allowed !!

Not sure what you're trying to achieve. If you pay higher rate tax you'll get 40% tax relief on any pension contributions you make on which you were subject to 40% tax. Where's the 'marginal gain'?

greatkingrat

The "gain" would be the 25% of the £11k that is tax-free, so you are essentially avoiding paying tax on £2750 which at 40% would save £1100.