Drawing out of pension to cover sole trader loss

Marcon

Grumpy_chap said:

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

This isn't a company car - he's a sole trader, and BIK applies only to directors and employees. For sole traders, profits are adjusted to reflect private use of a car etc.

BigGirlPants

Grumpy_chap said:

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).

Grumpy_chap said:

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).

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

I'm sorry but I don't understand what this means.

As the car is list price under £40,000, I understand it wouldn't have the ved premium tax in the future.

I also understand that that first year up to 100% write down only applies to brand new, electric only vehicles

I do also understand about the benefit kind although I'm not sure how this applies to a sole trader. He is not vat registered or a limited company.

I will research this.

We are aware that once he touched his pension he would be limited to paying in £10k a year if he wanted to continue making contributions.

He doesn't have an accountant, as we have just submitted the self-assessment annually ourselves with it being quite a small business. It is something I will ask him to consider though.

Grumpy_chap

Marcon said:

Grumpy_chap said:

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

This isn't a company car - he's a sole trader, and BIK applies only to directors and employees. For sole traders, profits are adjusted to reflect private use of a car etc.

Thanks - my mistake.

SVaz

He can LEASE a very nice car.  I did just that before I went self employed and needed a van.

Is he aware he might pay 40% tax on £9600 (the 8% above the 25% tax free cash? )  if his profits are close to the tax limit. 
So he wouldn’t have £40k to play with in the first place, even at 20% tax. 

Using a third of his pension for a car that will depreciate the second he drives it away from the dealer is absolute insanity,  and I LOVE cars. 

Over 10 years it will cost him WAY more than the £40k, what about all the lost growth on that money.  That £40k could easily double in a decade.
How much is he currently contributing to his pension?  

 

BigGirlPants

He is looking into leasing now also, thank you so much for that advice. 

I agree that it is not at all a sensible decision to make.

All the same, it's something he really wants and I don't want it to cause conflict between us. 

There's very very few things in life he has really wanted.

He is no longer making pension contributions.

"Over 10 years it will cost him WAY more than the £40k, what about all the lost growth on that money.  That £40k could easily double in a decade."

The above comment I completely agree with, this whole situation has brought lots of anxiety for me, as I really don't feel is the right choice to spend so.much money from his pension.

All the same I'm trying to help him get what he feels he really wants, as he doesn't mind that it's not a good financial choice. For him he really wants it emotionally.

SVaz

Is he looking at the £11k tax saving in year one ( the 100% capital allowance) rather than the whole picture? 

   I’m assuming that he’s a basic rate tax payer in all this as you haven’t said.  

How much is his yearly tax bill normally? 

Grumpy_chap

BigGirlPants said:

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

I'm sorry but I don't understand what this means.

As the car is list price under £40,000, I understand it wouldn't have the ved premium tax in the future.

I also understand that that first year up to 100% write down only applies to brand new, electric only vehicles

I do also understand about the benefit kind although I'm not sure how this applies to a sole trader. He is not vat registered or a limited company.

I will research this.

We are aware that once he touched his pension he would be limited to paying in £10k a year if he wanted to continue making contributions.

He doesn't have an accountant, as we have just submitted the self-assessment annually ourselves with it being quite a small business. It is something I will ask him to consider though.

Sorry if I caused confusion.
By the phrase "tax tail wagging the dog" I was referring to the scenario where some people see some tax efficiency and that then influences them to make a decision that they may not have made otherwise and may be an unwise decision in the whole (even allowing for the tax efficiency).
We don't have the full information here, bit that was reference to a 100% tax write down influencing the decision to spend £40k on a car and draw pension funds to do so even though the pension may not really be large enough to support this.

You are correct, list price under £40k will not attract the VED premium rate (based upon current rules).

My earlier reference to BIK appears to be my incorrect comment, as clarified by @Marcon - sorry for any confusion.

Marcon

BigGirlPants said:

I agree that it is not at all a sensible decision to make.

All the same, it's something he really wants and I don't want it to cause conflict between us. 

There's very very few things in life he has really wanted.

The above comment I completely agree with, this whole situation has brought lots of anxiety for me, as I really don't feel is the right choice to spend so.much money from his pension.

All the same I'm trying to help him get what he feels he really wants, as he doesn't mind that it's not a good financial choice. For him he really wants it emotionally.

Then sometimes so-called 'rules' need to be broken...emotion and logic don't always go hand in hand (although a short chat with an accountant to ensure any tax breaks are maximised could still be money well spent).

BigGirlPants

SVaz said:

Is he looking at the £11k tax saving in year one ( the 100% capital allowance) rather than the whole picture? 

   I’m assuming that he’s a basic rate tax payer in all this as you haven’t said.  

How much is his yearly tax bill normally? 

He is a basic rate taxpayer.

He's looking at what he can do to use whatever tax breaks etc would be appropriate in his situation.

He normally has between £15,000 and £20,000 taxable profit annually.

He's looking into leasing also. And that might be a really good idea as there is a hybrid car he likes, so a lease might be more appropriate, as a hybrid does not qualify for the same tax incentive but as far as I'm aware on a lease it makes no difference whether the car is ice, hybrid, or ev.

With a lease, is the deposit divided buy the monthly term of the lease, and then the business use deducted as a percentage?

 Is this also the same for a personal contract purchase?

Eg. ( just using easy figures for simplification)

Deposit £4800

Monthly payments £300

Term 48 months

So £4800 ÷48 = £100

Monthly payment £300+ £100 (deposit) =£400

£400 x 12 (months) = £4800

£4800 × 75% (business use) =

 £3600

£3600 is the annual tax deduction

(+75% of running costs)

TheSpectator

Seems to me a rather extreme way of not 'losing' the benefit of one's personal allowance.

To me, the most sensible route (if purchasing) would be treat it as 'normal' capital allowances rather than write off in one year and restrict and claim to what you need to reduce taxable profits to the level of the personal allowance carrying forward the WDV