Drawing out of pension to cover sole trader loss

BigGirlPants

Thank you for any advice.
My partner is a self-employed sole trader, he needs to replace his car.
He would be putting 75% of the costs through the business as he needs it 75% for business use.

If he bought an electric car, he could write it down as 75% tax deductible in the year of purchase, as I understand the tax benefit to encourage electric car ownership currently is up to 100% deductible in the year of purchase.

If he took money out of his pension (currently untouched) to cover a loss, as he wouldn't have made enough profit from self employment this year to cover the car purchase, would that mean he would not pay tax on the pension drawdown if his income was a loss rather than a profit this year due to the purchase of the car?

For example, 24/25 tax year-
Self-employed profit after expenses, but not including car purchase £20,000,
Car purchase £40,000.
 75% of car purchase £30,000.
Therefore loss £10,000.

If he drew £20,000 from.his pension, to cover the £10,000 loss and also £10,000 pounds to live off, which is still below his personal tax allowance of £12,570, would the be £20,000 pension drawdown be tax-free and  leave his 25% tax-free pension pot completely intact?

With this then mean in the 25/26 tax year he would be only pay tax on profit earned over £22,570, as the first £10,000 would be repaying his £10,000 back to him?

Please excuse me if I don't understand everything perfectly, I'm just doing my best to find information and support him, and this is very confusing!

Emmia

BigGirlPants said:

Type your messageThank you for any advice.
My partner is a self-employed sole trader, he needs to replace his car.
He would be putting 75% of the costs through the business as he needs it 75% for business use.

If he bought an electric car, he could write it down as 75% tax deductible in the year of purchase, as I understand the text benefit to encourage electric car ownership is currently, is up to 100% deductible in the year of purchase.

If he took money out of his pension (currently untouched) to cover a loss, as he wouldn't have made enough profit from self employment this year to cover the car purchase, would that mean he would not pay tax on the pension drawdown if his income was a loss rather than a profit this year due to the purchase of the car?

For example, 24/25 tax year-
Self-employed profit after expenses, but not including car purchase £20,000,
Car purchase £40,000.
 75% of car purchase £30,000.
Therefore loss £10,000.

If he drew £20,000 from.his pension, to cover the £10,000 loss and also £10,000 pounds to live off, which is still below his personal tax allowance of £12,570, would the be £20,000 pension drawdown be tax-free and  leave his 25% tax-free pension pot completely intact?

With this then mean in the 25/26 tax year he would be only pay tax on profit earned over £22,570, as the first £10,000 would be repaying his £10,000 back to him?

Please excuse me if I don't understand everything perfectly, I'm just doing my best to find information and support him, and this is very confusing!

I'm being critical, but why would he take money from his pension? Doesn't he have any savings to pay for the vehicle that aren't in the pension? If he doesn't, this should be a wake up call to have an emergency fund / non pension savings.

If he can't afford the vehicle of his preference, he should buy something he can afford.

Pensions are long term investments, not rainy savings accounts to buy things that depreciate hugely as soon as you drive them off the forecourt. 

Dazed_and_C0nfused

BigGirlPants said:

Type your messageThank you for any advice.
My partner is a self-employed sole trader, he needs to replace his car.
He would be putting 75% of the costs through the business as he needs it 75% for business use.

If he bought an electric car, he could write it down as 75% tax deductible in the year of purchase, as I understand the text benefit to encourage electric car ownership is currently, is up to 100% deductible in the year of purchase.

If he took money out of his pension (currently untouched) to cover a loss, as he wouldn't have made enough profit from self employment this year to cover the car purchase, would that mean he would not pay tax on the pension drawdown if his income was a loss rather than a profit this year due to the purchase of the car?

For example, 24/25 tax year-
Self-employed profit after expenses, but not including car purchase £20,000,
Car purchase £40,000.
 75% of car purchase £30,000.
Therefore loss £10,000.

If he drew £20,000 from.his pension, to cover the £10,000 loss and also £10,000 pounds to live off, which is still below his personal tax allowance of £12,570, would the be £20,000 pension drawdown be tax-free and  leave his 25% tax-free pension pot completely intact?

With this then mean in the 25/26 tax year he would be only pay tax on profit earned over £22,570, as the first £10,000 would be repaying his £10,000 back to him?

Please excuse me if I don't understand everything perfectly, I'm just doing my best to find information and support him, and this is very confusing!

Has he considered getting professional advice?

Does he use cash basis or traditional accounting?

He cannot take £20,000 of taxable income from his pension without taking a £6,667 TFLS as well.

Or £5,000 TFLS and £15,000 in taxable income.

Or £20,000 TFLS and no taxable income.

Other permutations would be possible but he cannot take taxable income without having taken the TFLS element.

And is he even old enough to access his pension?

MallyGirl

is he at least 55 years old?

SVaz

If the business can’t support the cost of a new car,  why not get one on lease or a 2nd hand one? 

I bought a 4 year old Van when I started my business and still have it because a year’s lease would be more than the van cost, it’s still going strong.  

Why can’t he get a car on finance or a loan and claim the payments as expenses, surely a better option than raiding his pension and being limited by the MPAA? 

Is he VAT registered? 

Keep_pedalling

I would have thought leasing would be the best option. There are some very good deals available at the moment. 

Marcon

BigGirlPants said:

Thank you for any advice.
My partner is a self-employed sole trader, he needs to replace his car.
He would be putting 75% of the costs through the business as he needs it 75% for business use.

If he bought an electric car, he could write it down as 75% tax deductible in the year of purchase, as I understand the text benefit to encourage electric car ownership is currently, is up to 100% deductible in the year of purchase.

If he took money out of his pension (currently untouched) to cover a loss, as he wouldn't have made enough profit from self employment this year to cover the car purchase, would that mean he would not pay tax on the pension drawdown if his income was a loss rather than a profit this year due to the purchase of the car?

For example, 24/25 tax year-
Self-employed profit after expenses, but not including car purchase £20,000,
Car purchase £40,000.
 75% of car purchase £30,000.
Therefore loss £10,000.

If he drew £20,000 from.his pension, to cover the £10,000 loss and also £10,000 pounds to live off, which is still below his personal tax allowance of £12,570, would the be £20,000 pension drawdown be tax-free and  leave his 25% tax-free pension pot completely intact?

With this then mean in the 25/26 tax year he would be only pay tax on profit earned over £22,570, as the first £10,000 would be repaying his £10,000 back to him?

Please excuse me if I don't understand everything perfectly, I'm just doing my best to find information and support him, and this is very confusing!

In broad terms you've managed to wend your way through the tax mire very well (and indeed creatively!), save for the bit about leaving the 25% tax free element of his pension intact. As already pointed out above, he can't take (potentially) taxable income from his pension pot without also taking some tax free cash. You've also not mentioned his age - he can't access his pension at all unless he is aged at least 55. Is he?

A bit of professional help might be no bad idea at this stage, though - an accountant in particular to ensure all is done correctly re the car purchase (at least from the tax perspective). 

Raiding a pension pot to buy a car isn't likely to be in his longer-term best financial interests unless he has a very substantial pot and will only be nibbling off a tiny proportion of it to buy the car. If other options are open to him (eg leasing), they'd be worth exploring with his accountant, though obviously much depends on his ability to access any form of credit.

Grumpy_chap

BigGirlPants said:

Thank you for any advice.
My partner is a self-employed sole trader, he needs to replace his car.
He would be putting 75% of the costs through the business as he needs it 75% for business use.

If he bought an electric car, he could write it down as 75% tax deductible in the year of purchase, as I understand the text benefit to encourage electric car ownership is currently, is up to 100% deductible in the year of purchase.

If he took money out of his pension (currently untouched) to cover a loss, as he wouldn't have made enough profit from self employment this year to cover the car purchase, would that mean he would not pay tax on the pension drawdown if his income was a loss rather than a profit this year due to the purchase of the car?

For example, 24/25 tax year-
Self-employed profit after expenses, but not including car purchase £20,000,
Car purchase £40,000.
 75% of car purchase £30,000.
Therefore loss £10,000.

If he drew £20,000 from.his pension, to cover the £10,000 loss and also £10,000 pounds to live off, which is still below his personal tax allowance of £12,570, would the be £20,000 pension drawdown be tax-free and  leave his 25% tax-free pension pot completely intact?

With this then mean in the 25/26 tax year he would be only pay tax on profit earned over £22,570, as the first £10,000 would be repaying his £10,000 back to him?

Please excuse me if I don't understand everything perfectly, I'm just doing my best to find information and support him, and this is very confusing!

Are you sure this is not the tax tail wagging the dog?

AIUI, the 100% first year allowance is only available if purchasing a brand new, first registered keeper EV.  Nothing second hand, not even a pre-reg, is eligible.  Otherwise, the car will be restricted to the Main Rate allowances (18%).

Have you considered the timing of the new car purchase?  If this is not completed swiftly (I don't mean to apply pressure - simply alerting the fact) then the premium VED surcharge will apply (depending on the list price of the vehicle).

Don't forget with any company car the resultant BIK that will arise.  I suspect that may be why an EV is attractive.

If he does not have an emergency fund, might it be better to simply opt for a lower cost car that does not require drawing funds from the pension?

Assuming he is old enough to draw funds from the pension, he has to draw taxable funds to achieve the tax write down as suggested as the tax write down cannot be written down against non-taxable income (but may be able to be carried forward to future years as a loss).
How sufficient is the pension to meet retirement needs?
Has any consideration been given to drawing taxable pension income and, hence, triggering the MPAA restricting future pension contributions benefitting from tax relief.  That may not be a concern this year, but may change in the future.

Does he have an Accountant?  A quick review by a professional informed of all the facts might be very worthwhile (though remember that an Accountant may not be knowledgeable or able to advise on matters relating to pension).

BigGirlPants

Thank you so much for your replies and help.

He is over 55 and so can access his pension.

He is looking into leases as well. 

I was unaware (and now I am educated) that he can't take some of his pension with out using some of the tax free amount.

The situation is a little bit emotional for him. He's worked really hard all his life, it isn't a very big pension and this car purchase would be a third of the pot.

He feels he's never had a very nice car and now he would like one, he is going to keep working for the foreseeable future, past his retirement age.

The car is a lot of money and I'm only trying to support him because he is such a good man and he does deserve to have something he wants that he feels will help him enjoy his days and bring him extra quality of life.

 It's not something I need. I'm driving a 15 year old car and I'm happy with it but I understand that he feels differently.

BigGirlPants

Emmia said:

BigGirlPants said:

Type your messageThank you for any advice.
My partner is a self-employed sole trader, he needs to replace his car.
He would be putting 75% of the costs through the business as he needs it 75% for business use.

If he bought an electric car, he could write it down as 75% tax deductible in the year of purchase, as I understand the text benefit to encourage electric car ownership is currently, is up to 100% deductible in the year of purchase.

If he took money out of his pension (currently untouched) to cover a loss, as he wouldn't have made enough profit from self employment this year to cover the car purchase, would that mean he would not pay tax on the pension drawdown if his income was a loss rather than a profit this year due to the purchase of the car?

For example, 24/25 tax year-
Self-employed profit after expenses, but not including car purchase £20,000,
Car purchase £40,000.
 75% of car purchase £30,000.
Therefore loss £10,000.

If he drew £20,000 from.his pension, to cover the £10,000 loss and also £10,000 pounds to live off, which is still below his personal tax allowance of £12,570, would the be £20,000 pension drawdown be tax-free and  leave his 25% tax-free pension pot completely intact?

With this then mean in the 25/26 tax year he would be only pay tax on profit earned over £22,570, as the first £10,000 would be repaying his £10,000 back to him?

Please excuse me if I don't understand everything perfectly, I'm just doing my best to find information and support him, and this is very confusing!

I'm being critical, but why would he take money from his pension? Doesn't he have any savings to pay for the vehicle that aren't in the pension? If he doesn't, this should be a wake up call to have an emergency fund / non pension savings.

If he can't afford the vehicle of his preference, he should buy something he can afford.

Pensions are long term investments, not rainy savings accounts to buy things that depreciate hugely as soon as you drive them off the forecourt. 

He doesn't have rainy day savings that he can use on a car. 

I personally agree with everything you've said.

 I am trying to support him as this is something he would really like, he has worked really hard all his life.

Maybe it's whats thought of as a 'midlife crisis', I don't really know but it's very important to him.

I'm just looking into the best ways that we can make it happen for him.

Grumpy_chap

A £40k car funded from a £120k pension fund seems to leave a significant risk of inadequate retirement funds for a comfortable retirement, assuming the £120k was sufficient in the first place.

He may intend to continue working past "normal" retirement age, but health may prevent him working forever.  At that point the pension will need to be sufficiently well funded to step up and provide the income that is required.