Transfering LISA to a Pension while 20% penalty in place.

Splitpin84

I'm thinking about taking money out of my LISA while the 20% penalty is in place and putting it into my pension because i want to max out my pension contributions for this tax year using my carried over allowances from previous years as I’m currently earning more than i have done in the past and want to make the most of any unused allowances before any potential changes to tax relief come in. I am a higher rate tax payer and im thinking i wont physically lose any money by doing this as i will benefit from the tax relief when it is put into the pension and reduce my overall earnings. 

Does anyone see any flaws in this scenario as i will not need the money anytime soon as i have an emergency savings pot that i believe is fully funded to cover me if anything was to come up and i only really opened the LISA for retirement purposes for the added bonus each year in anticipation of getting a higher paying job and hopefully maxing out annual allowance each year. 

I have no other debts apart from a fixed rate mortgage which i over pay the maximum allowable each year too as well.

First time posting but long time lurker and definitely a different question for you to discuss.

Dazed_and_C0nfused

Do you mean into a personal pension/SIPP or paying extra into your employers scheme?

Splitpin84

Personal Pension.

Dazed_and_C0nfused

That type of contribution doesn't reduce your taxable income.

It increase your basic rate tax band which means more tax can be paid at 20% and less at 40% (if you are earning enough).

The tax benefit will likely be the same but it won't reduce your income so if that was a specific driver then paying into a personal pension wont achieve that.

as i will benefit from the tax relief when it is put into the pension and reduce my overall earnings.

Brynsam

Splitpin84 said:

Personal Pension.

Then it won't reduce your overall earnings.

Splitpin84

Brynsam said:

Splitpin84 said:

Personal Pension.

Then it won't reduce your overall earnings.

I thought anything contributed to a personal pension plan or SIPP would reduce earnings as im self employed?

MallyGirl

really self employed or company director

Dazed_and_C0nfused

Nope.  For most people contributing to a SIPP or personal pension has no impact on their income tax liability.

But you do of course get basic rate tax relief added to your pension fund.  So if you contribute £4,000 the pension company will add £1,000 basic rate tax relief giving you a pension fund of £5,000.

If you are a higher rate taxpayer you may save some personal tax but it depends on how much higher rate tax you are liable on.

Splitpin84

Potential earnings for this year will be 100k so i was hoping to put 100k into my pension as only paid in 4k per year for the last 4 years and we can live off my wifes earnings. So was thinking this would result in me having to put 80k in to the pension plus tax relief gives me the full amount then 12.5k tax free allowance so would only need to pay tax on the remaining 7.5k at 20%. or am i completly off the mark with this?  

Splitpin84

MallyGirl said:

really self employed or company director

yes self employed but may need to change over to LTD company if paying into a pension doesnt reduce my earnings as i dont want to break the VAT threshold.

Dazed_and_C0nfused

Completely off the mark.

Don't understand your maths to be honest.  £80k from you plus tax relief at source = £100k.  So on your thinking why would you be taxed on £20k if your income was £100k??

Anyhow, if you contribute £100k (gross) to a relief at source pension such as a SIPP or personal pension then you will still have taxable income of 100k.

But your basic rate tax band will be increased from £37,500 to £137,500 so you will only pay 20% tax, no higher rate tax.