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Redundancy, 60% tax & Annual Allowance
Snot
Posts: 73 Forumite
in Cutting tax
Hi, I'm being made redundant and after taking into account carry forward I will end up in the 100-125k bracket so will lose some of my personal allowance, hence an effective tax rate of 60%.
I was reading on the M&G site that sometimes it makes sense to exceed the AA to avoid the personal allowance tax trap.
Presumably I would declare the AA excess and pay 40%.
Or am I totally misunderstanding this ?
I was reading on the M&G site that sometimes it makes sense to exceed the AA to avoid the personal allowance tax trap.
Presumably I would declare the AA excess and pay 40%.
Or am I totally misunderstanding this ?
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Comments
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The very short answer is that you can do that, although there are complex issues, but first check whether the current £60,000 annual allowance plus anything brought forward will suffice.0
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Jeremy535897 said:The very short answer is that you can do that, although there are complex issues, but first check whether the current £60,000 annual allowance plus anything brought forward will suffice.
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Jeremy, that for the link.
I think this is the key statement:
"annual allowance excess.......it will not lead to a high income child benefit tax charge or loss of the personal allowance etc."
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Snot said:Jeremy, that for the link.
I think this is the key statement:
"annual allowance excess.......it will not lead to a high income child benefit tax charge or loss of the personal allowance etc."
Prior to the removal of the lifetime allowance, there were other problems, and remember that you are effectively only getting 20% relief on the contribution, and will pay tax on the extra pension it generates.0 -
There's been a few other posts about exceeding the AA to avoid the 60% trap; so this is my thinking.
I'm just going to suck it up and pay the 60% on the basis that:
- The higher rate child benefit doesn't apply to me.
- I have no desire to load my pension to possibly avoid IHT at some point in the future.
- Valuing my pensions at 65 puts me just over the LTA (although I know it's being abolished).
- I've looked at VCT's but it's above my risk profile.
- If I paid the AA excess the 60% is effectively reduced to 40%, but then it would be taxable on the way out of the pension. As I plan to take my SIPP at 55 at which point I will already pay BR tax, so it's tax neutral.
Hopefully the above makes sense.
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I would certainly think very hard before incurring an annual allowance charge to save 20% tax, although you can get the pension scheme to pay it. I think your 3 and 5 are incompatible (regarding retirement age anyway), but I would also add that Labour could well reintroduce the LTA, and there are noises about whether it would be wise to raise the age people can access their pensions.1
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Just to clarify, I'm not going to exceed the AA, so I will pay the 60%.
Not sure I follow your comment about 3 and 5 being incompatible. I didn't explain previously, but the bulk of my pension provision is a deferred DB, if I was to take this at 55 it roughly halves the value, so LTA isn't an issue.
If I take the DB value at 65 in todays money, plus the current SIPP value, then LTA is an issue. But of course I have no idea how the SIPP will perform, nor what will happen with LTA etc. So something I will have to monitor.
Thanks Jeremy for your input on this and other threads, it is immensely useful.1 -
I just didn't see the point in valuing the pension at age 65 if you are taking it at age 55. There are rumours that the age limit may be raised, though.0
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