AVC - Taking 25% tax free for over 55.

Tax_Slave

Hi,
     I’m in the enviable position of being asked to come out of retirement and engage in full time employment at the age of 56.
As part of the employment I will be on a contract and work via an umbrella company who will pay me a salary after NI and Tax is deducted.
I expect the contract/employment to last approx 18 months and I will expect to earn £100K approx per year gross.
Question : If opened an AVC plan with a selected provider and after being paid put say £40k onto this in a tax year , I understand the provider will claim back 20% tax on this and add to the pot and I claim additional tax relief back via self assessment.
Do I put on under £40k so the total doesn’t exceed £40k when the 20% tax relief is added by provider or is £40k + 20% = £48k within the rules.

Question ; How long does the money have to be in an AVC before I can draw out 25% tax free?
(yes I know this crystallises fund etc)
Could I pay in £40k in tax year 2020/21 then £40k in tax year 2021/22 and then draw out 25% of fund tax free in year 2023?

Thanks
Kevin

dharm999

it depends.  Normally the maximum amount in to a pension, is £40k a year, including the tax relief.  So for a 40% tax payer, £40k contributions would cost £24k, after tax relief is taken in to account.  However, if you have any unused pension allowances from the 3 tax years prior to 20/21, then the unused amount can be carried forward, and as long as you earn enough, you can put more than £40k in to a pension and get tax relief without the £40k restriction in the 20/21 tax year.   

I assume you are going to be treated as an employee by the umbrella company.

dunstonh

Question : If opened an AVC plan with a selected provider and after being paid put say £40k onto this in a tax year , I understand the provider will claim back 20% tax on this and add to the pot and I claim additional tax relief back via self assessment.

If you use an AVC then its usually handled via payroll.  If you use a PPP, SHP or SIPP then you pay the net of basic rate figure and handle the higher rate relief via self assessment.   Caveat. some payroll systems use methods that do it differently.

It is unlikely that an AVC will be available to you given your structure.  

Question ; How long does the money have to be in an AVC before I can draw out 25% tax free?

Most AVCs do not support drawdown.  So, you would need to check that.    PPPs and SIPPs that do, can turn it around in 24 hours.

Could I pay in £40k in tax year 2020/21 then £40k in tax year 2021/22 and then draw out 25% of fund tax free in year 2023?

Yes.  As long as the plan supports drawdown.

Tax_Slave

dharm999 said:

it depends.  Normally the maximum amount in to a pension, is £40k a year, including the tax relief.  So for a 40% tax payer, £40k contributions would cost £24k, after tax relief is taken in to account.  However, if you have any unused pension allowances from the 3 tax years prior to 20/21, then the unused amount can be carried forward, and as long as you earn enough, you can put more than £40k in to a pension and get tax relief without the £40k restriction in the 20/21 tax year.   

I assume you are going to be treated as an employee by the umbrella company.

Thanks for the reply.
I have zero earnings for previous 3 years where I have been living off savings , so I can’t thus use any allowances of £40k from 3 previous years.

I understand the umbrella company treats me as an employee , but for taxation I’m charged income tax , employee NI , employer NI and an apprentice charge (£47 a month I think) that employers pay.
The alternate is to become a company (buy one formed off shelf) and then employ myself on minimum wage (pay my tax, NI etc) then I have VAT also to sort out and dividend that I pay myself ...a lot of hassle I can’t be bothered with to be honest even thou it’s a bit less tax each month to pay compared with umbrella option.

Tax_Slave

dunstonh said:

Question : If opened an AVC plan with a selected provider and after being paid put say £40k onto this in a tax year , I understand the provider will claim back 20% tax on this and add to the pot and I claim additional tax relief back via self assessment.

If you use an AVC then its usually handled via payroll.  If you use a PPP, SHP or SIPP then you pay the net of basic rate figure and handle the higher rate relief via self assessment.   Caveat. some payroll systems use methods that do it differently.

It is unlikely that an AVC will be available to you given your structure.  

Question ; How long does the money have to be in an AVC before I can draw out 25% tax free?

Most AVCs do not support drawdown.  So, you would need to check that.    PPPs and SIPPs that do, can turn it around in 24 hours.

Could I pay in £40k in tax year 2020/21 then £40k in tax year 2021/22 and then draw out 25% of fund tax free in year 2023?

Yes.  As long as the plan supports drawdown.

dunstonh said:

Question : If opened an AVC plan with a selected provider and after being paid put say £40k onto this in a tax year , I understand the provider will claim back 20% tax on this and add to the pot and I claim additional tax relief back via self assessment.

If you use an AVC then its usually handled via payroll.  If you use a PPP, SHP or SIPP then you pay the net of basic rate figure and handle the higher rate relief via self assessment.   Caveat. some payroll systems use methods that do it differently.

It is unlikely that an AVC will be available to you given your structure.  

Question ; How long does the money have to be in an AVC before I can draw out 25% tax free?

Most AVCs do not support drawdown.  So, you would need to check that.    PPPs and SIPPs that do, can turn it around in 24 hours.

Could I pay in £40k in tax year 2020/21 then £40k in tax year 2021/22 and then draw out 25% of fund tax free in year 2023?

Yes.  As long as the plan supports drawdown.

dunstonh said:

Question : If opened an AVC plan with a selected provider and after being paid put say £40k onto this in a tax year , I understand the provider will claim back 20% tax on this and add to the pot and I claim additional tax relief back via self assessment.

If you use an AVC then its usually handled via payroll.  If you use a PPP, SHP or SIPP then you pay the net of basic rate figure and handle the higher rate relief via self assessment.   Caveat. some payroll systems use methods that do it differently.

It is unlikely that an AVC will be available to you given your structure.  

Question ; How long does the money have to be in an AVC before I can draw out 25% tax free?

Most AVCs do not support drawdown.  So, you would need to check that.    PPPs and SIPPs that do, can turn it around in 24 hours.

Could I pay in £40k in tax year 2020/21 then £40k in tax year 2021/22 and then draw out 25% of fund tax free in year 2023?

Yes.  As long as the plan supports drawdown.

Thanks for the reply.
I will look into PPP’s and SIPPS as an alternate.

Blackbeard_of_Perranporth

The main question is that you say you have come out of retirement. If you have, and you have taken a pension, you will be limited to how much you can then invest in a pension. This is £4,000 a year for tax relief. If you invest more, you will be taxed on it as it is seen as recycling.  As you are 56, this should only be the last tax year.

You should seek further advice, which you received prior to taking your first pension!

cfw1994

Blackbeard_of_Perranporth said:

The main question is that you say you have come out of retirement. If you have, and you have taken a pension, you will be limited to how much you can then invest in a pension. This is £4,000 a year for tax relief. If you invest more, you will be taxed on it as it is seen as recycling.  As you are 56, this should only be the last tax year.

You should seek further advice, which you received prior to taking your first pension!

& specifically, if you have taken a penny from the *crystallised* portion of a pension. You could have taken 25% TFLS (aka PCLS) and still be fine to stash up to 40K away.

Tax_Slave

Blackbeard_of_Perranporth said:

The main question is that you say you have come out of retirement. If you have, and you have taken a pension, you will be limited to how much you can then invest in a pension. This is £4,000 a year for tax relief. If you invest more, you will be taxed on it as it is seen as recycling.  As you are 56, this should only be the last tax year.

You should seek further advice, which you received prior to taking your first pension!

Blackbeard_of_Perranporth said:

The main question is that you say you have come out of retirement. If you have, and you have taken a pension, you will be limited to how much you can then invest in a pension. This is £4,000 a year for tax relief. If you invest more, you will be taxed on it as it is seen as recycling.  As you are 56, this should only be the last tax year.

You should seek further advice, which you received prior to taking your first pension!

I took redundancy and able to live of savings until my final salary pensions start in a few years time.
Also I do have a AVC fund (£200k) but I have not touched this in any way it’s still invested and uncrystallised at the moment.

ratechaser

Tax_Slave said:

dharm999 said:

it depends.  Normally the maximum amount in to a pension, is £40k a year, including the tax relief.  So for a 40% tax payer, £40k contributions would cost £24k, after tax relief is taken in to account.  However, if you have any unused pension allowances from the 3 tax years prior to 20/21, then the unused amount can be carried forward, and as long as you earn enough, you can put more than £40k in to a pension and get tax relief without the £40k restriction in the 20/21 tax year.   

I assume you are going to be treated as an employee by the umbrella company.

Thanks for the reply.
I have zero earnings for previous 3 years where I have been living off savings , so I can’t thus use any allowances of £40k from 3 previous years.

I understand the umbrella company treats me as an employee , but for taxation I’m charged income tax , employee NI , employer NI and an apprentice charge (£47 a month I think) that employers pay.
The alternate is to become a company (buy one formed off shelf) and then employ myself on minimum wage (pay my tax, NI etc) then I have VAT also to sort out and dividend that I pay myself ...a lot of hassle I can’t be bothered with to be honest even thou it’s a bit less tax each month to pay compared with umbrella option.

Yes you can. It's earnings in the current input year that count, not the year you're carrying over from (I've been in exactly the same situation and am using 40k carryover from years where I had zero earned income).

The only requirement for carryover is that during those years you were a member of an active pension scheme. Not sure how precisely that is defined (I'm sure that Dunstonh will know far better than me) but I've always taken it to mean having had a pension during those years that you could potentially have paid into.

Albermarle

it depends.  Normally the maximum amount in to a pension, is £40k a year, including the tax relief.  So for a 40% tax payer, £40k contributions would cost £24k, after tax relief is taken in to account

The above is correct, but probably worth noting that for a higher rate taxpayer , paying pension contributions from after tax income , only the basic rate relief goes directly in the pension . The higher rate relief is claimed back separately , either as a rebate or an increased personal allowance.

So if the OP added £24K - the pension provider would add £8K - so £32K in the pension . Then £8K in higher rate relief paid direct to the OP , to do what they liked with it.

garmeg

Albermarle said:

it depends.  Normally the maximum amount in to a pension, is £40k a year, including the tax relief.  So for a 40% tax payer, £40k contributions would cost £24k, after tax relief is taken in to account

The above is correct, but probably worth noting that for a higher rate taxpayer , paying pension contributions from after tax income , only the basic rate relief goes directly in the pension . The higher rate relief is claimed back separately , either as a rebate or an increased personal allowance.

So if the OP added £24K - the pension provider would add £8K - so £32K in the pension . Then £8K in higher rate relief paid direct to the OP , to do what they liked with it.

Basic tax relief is 20% and higher rate is 40% so ...

First £8k should read £6k.
£32k should read £30k.
Second £8k should read £6k as well.

You probably meant 
£32k into pension
Provider tops up by £8k to £40k via tax relief.
Another £8k claimed from HMRC as higher rate relief but thus is paid direct to the OP not the pension.

This may not be correct if OP earns less than £90k because would need to earn at least this to get £40k relieved at 40%.