What to do with Deferred State Pension Lump Sum

I have dreamed up a fantastic idea that is so great that is bound to be - WRONG. But here it is so that people smarter than me can tell me what the flaws are.


Having deferred taking my State Pension for some years I have now started, and have decided to take the significant Capital Sum on offer rather than extra income. (I already have adequate income from other sources and there is little prospect of my dropping to a lower tax band in the foreseeable future, but every chance that, if I take a higher weekly pension, future chancellors will try to claw back more).


The amount of the lump sum will be reduced before I get, it by the deduction of tax at my marginal rate (40%). Those are the rules and I'm by no means complaining, but all the same I would like to ease the pain a bit, so here is my thought.


If I use the total net amount (60%) to buy VCTs in the current FY, my in-year tax bill will be reduced by 30% of that, ie 18% of the total, which means that my effective reduction will be 22% rather than 40%. I am happy with the maths, but less so with interpreting the rules; my idea only works if I pay enough tax in year, so the key question is whether the tax deducted 'at source' from my lump sum counts towards my annual tax bill. Otherwise, I will have to try to work out if I will owe enough tax from all other sources to swallow up the 30% VCT 'credit'.


Whether I should invest in VCTs at all is a totally different question, of course. That's a personal problem that I wouldn't dream of asking for advice on!
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Comments

  • agrinnall
    agrinnall Posts: 23,344
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    I can't see why it wouldn't count, but it's not an area I have any specific knowledge of so you should wait until somebody who does posts a response.
  • agrinnall wrote: »
    I can't see why it wouldn't count, but it's not an area I have any specific knowledge of so you should wait until somebody who does posts a response.
    Thanks for another prompt reply, agrinnall. I'd love to think that the simple, common sense answer was right, but I've been around too long to rely on that!
  • jimmo
    jimmo Posts: 2,281
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    The State pension lump sum is assessable to Income Tax. The deduction made by the DWP is a PAYE deduction and is provisional, subject to adjustment in the year's assessment.
    https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim74651
    https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim74652
    I would suggest you also look at the following couple of pages in that manual
    You already seem to know this but, for completeness, VCT relief is limited to the amount of tax charged in the year.
    https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm51030
  • kidmugsy
    kidmugsy Posts: 12,709
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    I'd have thought you'd have a better chance if you got down to 20% tax by making a big pension contribution. Which you couldn't, alas, if you don't have any earnings in this tax year.
    Free the dunston one next time too.
  • Dazed_and_confused
    Dazed_and_confused Posts: 6,458
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    edited 11 October 2018 at 10:22PM
    I don't think making yourself a basic rate payer in that way actually prevents the higher rate tax being payable on the deferred pension.

    Useful article which goes into more detail,

    https://www.taxadvisermagazine.com/article/lump-sums
  • My thanks to everyone for taking the time and trouble to contribute, but I still don't have the answer.


    Jimmo - yes, I do know that VCT relief is limited to the amount of tax charged in the year. That is why I asked the basic question, which is whether the amount deducted from the lump sum before I receive it is considered to be included in "the amount of tax charged in the year". If it is, my idea works. If it isn't, it doesn't!

    None of the helpful articles referenced by you all address this specific question, perhaps because the answer is too obvious to need addressing. I certainly hope so; as aggrinall said at the outset, common sense suggests it would be included. But it is my sad experience that common sense and tax regulations don't always coincide.


    By the way, none of the other suggestions work - I have no earned income so my scope for pension contributions is limited.
  • [QUOTE=HarperBoy;74906385
    Jimmo - yes, I do know that VCT relief is limited to the amount of tax charged in the year. That is why I asked the basic question, which is whether the amount deducted from the lump sum before I receive it is considered to be included in "the amount of tax charged in the year". If it is, my idea works. If it isn't, it doesn't!

    .[/QUOTE]

    Ultimately it is the amount of tax which becomes chargeable on you on all of your income. So, if £1000 was deducted from the lump sum but, ultimately, your tax liability was only £400, the maximum relief for your VCT would be £400.
  • jimmo
    jimmo Posts: 2,281
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    HarperBoy wrote: »
    My thanks to everyone for taking the time and trouble to contribute, but I still don't have the answer.

    Sorry but exactly which bit of "The State pension lump sum is assessable to Income Tax." is unclear?
  • jimmo wrote: »
    Sorry but exactly which bit of "The State pension lump sum is assessable to Income Tax." is unclear?

    I am guessing, jimmo, that the op is querying if the tax DEDUCTED from the lump sum must be equal to or more than the amount to be claimed on the VCT as opposed to the eventual tax liability overall meeting the same criteria.

    Clearly if the resultant tax liability is less than the amount deducted from the lump sum it is this lower amount which constitutes the maximum claimable.
  • HarperBoy
    HarperBoy Posts: 25
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    edited 12 October 2018 at 4:03PM
    I think people have become confused by assuming that there is something complicated in my question. There isn't, it really is as simple as I originally stated. As I said in my original post "the key question is whether the tax deducted 'at source' from my lump sum counts towards my annual tax bill."


    I am quite clear that the lump sum will be paid with tax deducted. What I am not clear about is whether that deduction counts as 'tax' for the purposes of my HMRC Self Assessment return. (See my post of 0949 this morning).

    It may be that everyone has assumed that can't be my question because the answer is so obvious, and have looked behind it to seek out my "true meaning"! But I regret that experience tells me never to assume that obvious common sense interpretations apply when dealing with HMRC.
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