Getting Round the Lifetime Allowance

exvirilis

I saw on another forum a post by someone who seems to have found a way to get round the LTA by using ISA's.  Apologies if you guys know this, but this is news to me, and definitely something I want to do if it's true.  The post was this:

Option 1

Earn £120k. Put £20k into your work pension. £20k appears in your pension that is sacrificed. No tax is paid on that. You are taxed on £100k.

Option 2

Earn £120k. You put £16k out of your net pay into your SIPP. This is topped up in your SIPP to £20k with basic rate relied. You paid tax on that £16k so on your tax return you report that you made a contribution of £20k (i.e. include the tax relief in the fund). You are basically saying you have earned £100k. The difference in tax between £100k and £120k is circa £12k due to the taper of the personal allowance. You got £4k relief "at source" in the pension. HMRC have to refund you the other £8,000 in cash. 

So instead of all your tax relief trapped in your work pension, £4k of it is trapped in your SIPP and £8k is free to use. If you put £4k of that into a lifetime ISA, the govt tops this up to £5k. You then put the rest in a normal ISA and all those amounts grow tax free. 

 

So if I took option 2, then instead of having to put 100% into the pension, I can instead take the 8k and put it into an ISA.    For me this is massive because I am in my 50s and will bump up against LTA, but I don't tend to contribute much into ISAs.  So this would be a good route for me.

hugheskevi

Look at option 1 and option 2 with real figures.

Option 1 - (assume salary sacrifice with no employer NI refunded). Take home is £65,603.70 and you have £20K in pension.

Option 2 - Take home is £72,953.70 from which you put £16,000 into a pension leaving £56,953.70 take home, which then gets £8,000 tax refund from HMRC giving you £64,953.70 whilst the pension is grossed up to £20K.

Also, given your age you presumably do not have a Lifetime ISA and are too old to open one?

HappyHarry

There is no tax difference with options 1 and 2. In neither case do you lose your personal allowance. In both cases you end up with  £20,000 in your pension.

However, , in option 2 you pay more NI and so your take home pay is lower.

In addition, by using option 2, you may be losing some or all of an employer's pension contribution.


*edit - crossed with @hugheskevi above 

exvirilis

yep too old for a lifetime ISA

exvirilis

Ah yes ok thanks I'm being daft.  The 16k has already gone into the pension, so the 8k just makes up the tax shortfall. Yes, you still have 20k in a pension each way, so this doesn't get round the LTA    

Albermarle

However as a general point if one is a higher rate taxpayer , then with a salary sacrifice or net pay scheme all the tax relief goes automatically into the pension . Whereas with a relief at source scheme the higher rate relief comes back to you directly and not to the pension .