Lump sum recycling advice please

MK62

1) Yes
2) Impossible to answer at the moment as you haven't given enough information.
Personal Allowance adjustments, other income (interest, dividends, rental income.....and so on), LTA already used, current size of DC pot (estimated),....for starters....
The optimum will be the maximum amount you can contribute without either a) risking another test against the PCLS recycling rules or b) running into an LTA tax charge.

Dazed_and_C0nfused

MK62 said:

1) Yes
2) Impossible to answer at the moment as you haven't given enough information.
Personal Allowance adjustments, other income (interest, dividends, rental income.....and so on), LTA already used, current size of DC pot (estimated),....for starters....
The optimum will be the maximum amount you can contribute without either a) risking another test against the PCLS recycling rules or b) running into an LTA tax charge.

In this case the op's optimum amount is paying the minimum which negates all higher rate tax liability, not getting the most into their DC pension.

I want to minimise my overall tax liability whether against salary or drawdown and I don't want to pay uneccessary funds into the DC scheme.  

0779mike

My tax code is 951L.
I have no other income this Financial Year. I have about £43k (pre-corona figure) in a Stocks and Shares ISA, all in accumulation funds.
The DC pot with my current employer is approx £21,500.  The only tax-free lump sum that I have ever taken is £131,665 so I assume my LTA is not a worry.
Do you all think I need to hire an IFA to get this right ? 

0779mike

Dazed_and_C0nfused said:

MK62 said:

1) Yes
2) Impossible to answer at the moment as you haven't given enough information.
Personal Allowance adjustments, other income (interest, dividends, rental income.....and so on), LTA already used, current size of DC pot (estimated),....for starters....
The optimum will be the maximum amount you can contribute without either a) risking another test against the PCLS recycling rules or b) running into an LTA tax charge.

In this case the op's optimum amount is paying the minimum which negates all higher rate tax liability, not getting the most into their DC pension.

I want to minimise my overall tax liability whether against salary or drawdown and I don't want to pay uneccessary funds into the DC scheme.  

I thought I would pay more in because I will get 25% of it back in the future as a PCLS.

Dazed_and_C0nfused

0779mike said:

My tax code is 951L.
I have no other income this Financial Year. I have about £43k (pre-corona figure) in a Stocks and Shares ISA, all in accumulation funds.
The DC pot with my current employer is approx £21,500.  The only tax-free lump sum that I have ever taken is £131,665 so I assume my LTA is not a worry.
Do you all think I need to hire an IFA to get this right ? 

Do you know why it is 951L?

The deductions in your tax code could impact things.

0779mike

I think my tax code is 951L because in the previous FY i didn't pay enough tax due to a one-off payment from a previous employer which wasn't taxed correctly and medical Benefit-in-Kind.

Dazed_and_C0nfused

I just checked and my actual total salary this FY will be £59,217, so with the pensions payments received that will be a total taxable income this FY of £86148.

So the current position appears to be as above and if your tax code is just lower because of some tax underpaid then your tax liability for 2019:20, ignoring the tax owed from an earlier tax year, would be

£86,148 less Personal Allowance £12,500 = £73,648 income to be taxed

£37,500 x 20% = £7,500

£36,148 x 40% = £14,459.20

Total tax due for the year £21,959.20

A net SIPP contribution of £28,918.40 would have £7,229.60 basic rate tax relief added by the pension company making a gross contribution of £36,148.  Which in turn means your basic rate tax band is £73,648 not £37,500.

Any other taxable income not included in your £86,148 figure will alter things (this seems to be salary plus pension income so not sure what has happened to the medical benefit you have referred to, did this stop before the 2029:20 tax year?) and I have also

a)  assumed you are not Scottish resident for tax purposes in 2019:20

b) are eligible to make such a contribution and receive basic rate tax relief on it.

MK62

Dazed_and_C0nfused said:

MK62 said:

1) Yes
2) Impossible to answer at the moment as you haven't given enough information.
Personal Allowance adjustments, other income (interest, dividends, rental income.....and so on), LTA already used, current size of DC pot (estimated),....for starters....
The optimum will be the maximum amount you can contribute without either a) risking another test against the PCLS recycling rules or b) running into an LTA tax charge.

In this case the op's optimum amount is paying the minimum which negates all higher rate tax liability, not getting the most into their DC pension.

I want to minimise my overall tax liability whether against salary or drawdown and I don't want to pay uneccessary funds into the DC scheme.  

The OP said he wanted to minimise his tax liability against salary AND drawdown........just negating his HR tax liability for this tax year will not accomplish that alone....not fully anyway.....the optimum amount to do that is the maximum he can put into his pension, as even that relieved at 20% this year can later be withdrawn at an effective 15% due to the tax free element.

Dazed_and_C0nfused

MK62 said:

Dazed_and_C0nfused said:

MK62 said:

1) Yes
2) Impossible to answer at the moment as you haven't given enough information.
Personal Allowance adjustments, other income (interest, dividends, rental income.....and so on), LTA already used, current size of DC pot (estimated),....for starters....
The optimum will be the maximum amount you can contribute without either a) risking another test against the PCLS recycling rules or b) running into an LTA tax charge.

In this case the op's optimum amount is paying the minimum which negates all higher rate tax liability, not getting the most into their DC pension.

I want to minimise my overall tax liability whether against salary or drawdown and I don't want to pay uneccessary funds into the DC scheme.  

The OP said he wanted to minimise his tax liability against salary AND drawdown........just negating his HR tax liability for this tax year will not accomplish that alone....not fully anyway.....the optimum amount to do that is the maximum he can put into his pension, as even that relieved at 20% this year can later be withdrawn at an effective 15% due to the tax free element.

I thought the op was really focusing on keeping the current tax years liability as low as possible and in a later post the op did say,

1) Can I reduce my tax burden in this financial year by making an APC ?
2) If so, what is the optimum figure that I should contribute ? 

But can see the objective might be different, in which case it could be argued the optimum payment would be the absolute maximum possible which attracts the basic rate uplift?

MK62

Yeah, I suppose you could read it either way......

The concern I would have about the OP's plan (if I was in the OP's shoes) is this (from the Pru's guidance on recycling)

The test is for increased contributions over the cumulative period exceeding 30% of the PCLS. The cumulative period includes the tax year the PCLS is received, two full tax years preceding this date and two full tax years following this date.

Importantly, this rule refers to the single PCLS payment received at this benefit crystallisation event. It is not the total amount of PCLS paid in the 12 month period considered above.

The way I'm reading that is - when the OP takes his second PCLS, which will probably be iro 25-30k, the test for "significantly increased contributions" in the "cumulative period", will be made against that PCLS alone - if that is the case, then the APC contribution would fall foul of this (as it would be way over 30% of the second PCLS (25-30k)), and as the other 5 recycling conditions may also have been met, HMRC might then deem the second PCLS an unauthorised payment, and issue the OP with a tax charge against it. I'm not an expert here though and I accept that the Pru's interpretation of the rules, and/or my interpretation of their interpretation could be incorrect. HMRC's guidance is a bit vague here too....

I suppose the OP could avoid any doubt by delaying the second PCLS by at least 2 further tax years (so taking the APC contribution outside the "cumulative period"), and use UFPLS withdrawals during that time (which, according to the same Pru paper, do not count as PCLS as far as the recycling rules go)......and also restrict the APC contribution to <30% of the first PCLS. He may be able to do a bigger APC, but it could come down to HMRC's interpretation of whether it is because of that first PCLS.....and they appear to be quite vague on that (perhaps deliberately so). 

Perhaps one of the IFAs on the forums could offer something more definitive on this......