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  • FIRST POST
    • HarperBoy
    • By HarperBoy 11th Oct 18, 11:52 AM
    • 15Posts
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    HarperBoy
    What to do with Deferred State Pension Lump Sum
    • #1
    • 11th Oct 18, 11:52 AM
    What to do with Deferred State Pension Lump Sum 11th Oct 18 at 11:52 AM
    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!
Page 1
    • agrinnall
    • By agrinnall 11th Oct 18, 2:08 PM
    • 21,222 Posts
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    agrinnall
    • #2
    • 11th Oct 18, 2:08 PM
    • #2
    • 11th Oct 18, 2:08 PM
    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.
    • HarperBoy
    • By HarperBoy 11th Oct 18, 2:13 PM
    • 15 Posts
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    HarperBoy
    • #3
    • 11th Oct 18, 2:13 PM
    • #3
    • 11th Oct 18, 2:13 PM
    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.
    Originally posted by agrinnall
    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
    • By jimmo 11th Oct 18, 10:40 PM
    • 1,984 Posts
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    jimmo
    • #4
    • 11th Oct 18, 10:40 PM
    • #4
    • 11th Oct 18, 10:40 PM
    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
    • By kidmugsy 11th Oct 18, 11:06 PM
    • 11,773 Posts
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    kidmugsy
    • #5
    • 11th Oct 18, 11:06 PM
    • #5
    • 11th Oct 18, 11:06 PM
    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
    • By Dazed and confused 11th Oct 18, 11:16 PM
    • 3,013 Posts
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    Dazed and confused
    • #6
    • 11th Oct 18, 11:16 PM
    • #6
    • 11th Oct 18, 11:16 PM
    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
    Last edited by Dazed and confused; 11-10-2018 at 11:22 PM.
    • HarperBoy
    • By HarperBoy 12th Oct 18, 9:49 AM
    • 15 Posts
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    HarperBoy
    • #7
    • 12th Oct 18, 9:49 AM
    Still Unclear
    • #7
    • 12th Oct 18, 9:49 AM
    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.
    • purdyoaten2
    • By purdyoaten2 12th Oct 18, 11:54 AM
    • 936 Posts
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    purdyoaten2
    • #8
    • 12th Oct 18, 11:54 AM
    • #8
    • 12th Oct 18, 11:54 AM
    [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.
    Would 'OF', Could 'OF', Should 'OF'.... AAAARRRRGGGGHHHH!
    • jimmo
    • By jimmo 12th Oct 18, 12:11 PM
    • 1,984 Posts
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    jimmo
    • #9
    • 12th Oct 18, 12:11 PM
    • #9
    • 12th Oct 18, 12:11 PM
    My thanks to everyone for taking the time and trouble to contribute, but I still don't have the answer.
    Originally posted by HarperBoy
    Sorry but exactly which bit of "The State pension lump sum is assessable to Income Tax." is unclear?
    • purdyoaten2
    • By purdyoaten2 12th Oct 18, 1:52 PM
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    purdyoaten2
    Sorry but exactly which bit of "The State pension lump sum is assessable to Income Tax." is unclear?
    Originally posted by jimmo
    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.
    Would 'OF', Could 'OF', Should 'OF'.... AAAARRRRGGGGHHHH!
    • HarperBoy
    • By HarperBoy 12th Oct 18, 5:01 PM
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    HarperBoy
    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.
    Last edited by HarperBoy; 12-10-2018 at 5:03 PM. Reason: Clarification
    • purdyoaten2
    • By purdyoaten2 12th Oct 18, 5:21 PM
    • 936 Posts
    • 462 Thanks
    purdyoaten2
    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.
    Originally posted by HarperBoy
    I thought that I had explained it! Anyway:

    After including ALL of your income, including your lump sum - what is your tax liability? - NOT what you OWE after deducting tax already paid. This answer and only this answer is the maximum tax that can be relievable against your VCT.

    For example - you may have PAYE income of 12000 with 1000 tax deducted. Assuming a personal allowance of 11850, your tax LIABILITY is 30 (150 at 20%) The maximum tax claimable against VCT is 30. NOT 1000 as 970 will be refunded as overpaid.

    Whether you have overpaid or underpaid on your lump sum with reference to your final tax liability is an entirely different matter.You must include all tax paid including that paid on your lump sum on your self-assessment.
    Last edited by purdyoaten2; 12-10-2018 at 5:23 PM.
    Would 'OF', Could 'OF', Should 'OF'.... AAAARRRRGGGGHHHH!
    • Dazed and confused
    • By Dazed and confused 12th Oct 18, 7:35 PM
    • 3,013 Posts
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    Dazed and confused
    "the key question is whether the tax deducted 'at source' from my lump sum counts towards my annual tax bill."
    If it doesn't count towards the bill that would mean DWP deduct 40% which isn't "tax" and then HMRC would want an additional 40% off the op to meet his tax liability.

    Leaving the op with 20% of the lump sum
    • jimmo
    • By jimmo 12th Oct 18, 9:13 PM
    • 1,984 Posts
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    jimmo
    Apologies if I have used jargon unwittingly. If you tell DWP that your marginal rate is 40% they will deduct 40% and, provided you are correct that 40% will count as tax paid (and charged) for the year. However if it later turns out that you are wrong HMRC will adjust after the end of the year to the correct figure. If it turns out that your marginal rate is 20% then HMRC will keep 20% and repay you 20%. You would then only be able to use the net 20% against your VCT relief claim.
    If your marginal rate turns out to be 45% HMRC will charge you the additional 5% and you will be able to use the full 45% against your VCT relief claim. All this will be done by way of an assessment.
    Does that make sense?
    • HarperBoy
    • By HarperBoy 13th Oct 18, 1:32 PM
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    HarperBoy
    Yes, perfect sense. I expect to receive 60% of the notified Lump Sum, because I'm as sure as can be that my marginal rate will be 40%, no higher and no lower, as I have already told DWP.
    In the unlikely event it turns out to be 20% (45% is unreachable for me in practice, I should be so lucky!) then I would expect adjustments in due course, as you describe. That would be an embarrassment if I had already invested the whole 60% in VCTs, but there are 2 reasons why I am not too concerned on that score. One is that there is almost no chance, so far as I can see, of dropping to a 20% marginal rate in this FY. The other is that, having looked closely at my other finances, I believe I have just about enough tax liability in any case to swallow up the VCT relief, even if (as my most pessimistic interpretation suggests) the 40% deduction doesn't count towards my 'tax paid' figure for the FY.
    • polymaff
    • By polymaff 13th Oct 18, 3:25 PM
    • 2,281 Posts
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    polymaff
    My wife took her state pension lump sum in tax year 2015/16 and included the lump sum in her tax year 2015/16 self assessment. The tax due on the lump sum was part of the calculation of her tax year 2015/16 liability, collected in payments due 31 Jan 2017.
    • HarperBoy
    • By HarperBoy 13th Oct 18, 5:08 PM
    • 15 Posts
    • 0 Thanks
    HarperBoy
    That's Sorted That!
    My wife took her state pension lump sum in tax year 2015/16 and included the lump sum in her tax year 2015/16 self assessment. The tax due on the lump sum was part of the calculation of her tax year 2015/16 liability, collected in payments due 31 Jan 2017.
    Originally posted by polymaff

    Well, many thanks to Polymaff. That is exactly what I have been trying to establish - you have cleared up what (perhaps) shouldn't have been a query in the first place if I weren't so pessimistic about all things taxical!
    • polymaff
    • By polymaff 13th Oct 18, 5:24 PM
    • 2,281 Posts
    • 994 Thanks
    polymaff
    Well, I thought that someone should respond to your query
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