How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask bigduckontax Your Own Question

bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3372
Experience:  FCCA FCMA CGMA ACIS
75394688
Type Your Tax Question Here...
bigduckontax is online now

Paying into a defined pension scheme to reduce tax band

Customer Question

Paying into a defined pension scheme to reduce tax band from 40% to basic 20%

Mr A has made a capital gain of £320k

Mr A is a 40% tax payer therefore CGT would be payable at 28% but Mr A would like to pay CGT at 18% by making his employment income only subject to 20% tax.

What he intends to do is pay salary subject to 40% band into pensions before his employer pays his monthly salary (salary exchange or smart pension), this way his taxable income is reduced through PAYE.

Please advise me on the below calculations.

Capital Gain 320,000

CGT at 28% 89,600

CGT at 18% 57,600

Gross Income 80,370

Pension contribution 39,200

Revised Gross Income 41,170

Personal Allowance 10,600

Benefit in Kind 891

Revised Personal Allowance 9,709

Taxable Income 31,461

Tax calculations Basic rate 20% @ 31,461 = 6,292.20

Higher rate 40% @ 0

National insurance NI PA 8,060.00 = 0

NI at 12% 33,110.00 = 3,973.20

NI at 2% 0.00 = 0

Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to check your figures. As far as I can see tour scenario appears correct. I do hope I have set your mind at rest on this matter.
Customer: replied 1 year ago.

Hi

Mr A's employer will pay around £6,000 regardless of Mr A's personal contribution.

Therefore, if Mr A makes a personal contribution of £39,200 that will make total contribution of £45,200. Above the £40,000 limit.

What is the impact of going over the limit? Mr A will not get tax relief of anything over £40k?

I heard that past 2 years unused allowance can be used retrospectively?

Expert:  bigduckontax replied 1 year ago.
Here is what happens if the annual allowance of pension contribution is exceeded [source: The Pensions Advisory Service]:'If you exceed the annual allowance in a year, you won't receive tax relief -on any contributions you paid that exceed the limit and you will be faced with an annual allowance charge. The annual allowance charge will be added to the rest of your taxable income for the tax year in question, when determining your tax liability. Alternatively, if the annual allowance charge is more than £2,000, you can ask your pension scheme to pay the charge from your benefits. This means your pension scheme benefits would be reduced.' However, if you have unused contribution levels from prior years these can be brought forward to offset the above the limit payments which should cover your problem. Here is more advice from the same source: 'Carry forward allows you to make use of any annual allowance that you may not have used during the three previous tax years, provided that you were a member of a registered pension scheme. You can use carry forward is you’re an active member currently building up pension benefits; a deferred member with paid-up pension benefits; a pensioner or a pension credit member, where you have a share of your ex-partner’s pension.'
Customer: replied 1 year ago.

ok thanks.

the main purpose of Mr A is to reduce his tax band in FY15/16.

Option A is to sacrifice over the next 7 months £5,600 per month (total £39,200), then this gets deducted before salary is paid consequently no tax is charged through PAYE.

Option B is say in Mar-16, Mr A sends a cheque for £39,200 to his pension provider (Scottish Widows), then claims tax relief when submitting a tax return for FY15/16.

Would option B still make Mr A lower band (20%) tax payer for that year? Therefore still able to pay CGT at 18% on the capital gain.

Expert:  bigduckontax replied 1 year ago.
Option A is feasible. Option B is feasible also, but you did state earlier that Mr A's employer is also paying in to the pension scheme and the combined contributions may not exceed 40K so there might be a problem here. Capital gains tax is levied at 18% or 28% or a combination of the two rates depending on the income including the gain in the tax year of sale. With Mr A's income just squeezed under the 20% tax bracket wire the capital gains would be likely charged at 28%. I am so sorry to have to rain on your parade. Please be so kind as to rate me before you leave the Just Answer site.
Customer: replied 1 year ago.

You been really helpful so far. I will rate you...just need a bit more clarification.

Total contributions including employers will be around £45k. Its over £40 but the rules state that previous three years unused allowance can be utilised. I confirm that Mr A has a lot of unutilised allowance, say just last year alone around £34k. Therefore this part is ok.

Mr A's taxable income will be £31,461 after contribution into the pension with the 20% band.

Can you please clarify further what you mean by "Capital gains tax is levied at 18% or 28% or a combination of the two rates depending on the income including the gain in the tax year of sale."

Why would the below happen if Mr A becomes a 20% rate tax payer in the year capital gain arose?

Is capital gains added to salary income to work out the total income for the year and then applying the CGT rate?

My understanding was that CGT is not added to say salary income.

"With Mr A's income just squeezed under the 20% tax bracket wire the capital gains would be likely charged at 28%."

Expert:  bigduckontax replied 1 year ago.
Mr A is right on the cusp of the 20% tax bracket, but CGT is levied on the income including the gain, the gain is added to the income, so in this case he would have no slack to absorb and any gain taxed at 28%.
CGT is not added to any other income, but for taxation purposes the gain itself is aggregated with all other income to determine the rate of CGT.
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3372
Experience: FCCA FCMA CGMA ACIS
bigduckontax and other Tax Specialists are ready to help you
Customer: replied 1 year ago.

Thank you.

Just for safety I will put it out for a second opinion.

Expert:  bigduckontax replied 1 year ago.
Thank you for your support.

What Customers are Saying:

 
 
 
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C.
< Previous | Next >
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C.
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP
  • I couldn't be more satisfied! This is the site I will always come to when I need a second opinion. Justin
  • Just let me say that this encounter has been entirely professional and most helpful. I liked that I could ask additional questions and get answered in a very short turn around. Esther
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C.
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex
 
 
 

Meet The Experts:

 
 
 
  • Sam

    Sam

    Accountant

    Satisfied Customers:

    7088
    26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
< Previous | Next >
  • http://ww2.justanswer.com/uploads/TA/Tax Expert/2013-8-21_231010_sam.64x64.jpg Sam's Avatar

    Sam

    Accountant

    Satisfied Customers:

    7088
    26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
  • http://ww2.justanswer.com/uploads/BI/bigduckontax/2013-8-12_222058_1.64x64.jpg bigduckontax's Avatar

    bigduckontax

    Accountant

    Satisfied Customers:

    2333
    FCCA FCMA CGMA ACIS
  • http://ww2.justanswer.com/uploads/TA/TaxRobin/2013-8-28_16186_femalebusinessprofessionalbinderhand11038485.64x64.jpg TaxRobin's Avatar

    TaxRobin

    Tax Consultant

    Satisfied Customers:

    524
    International tax
  • /img/opt/shirt.png taxadvisor.uk's Avatar

    taxadvisor.uk

    Chartered Certified Accountant

    Satisfied Customers:

    2845
    FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
  • http://ww2.justanswer.com/uploads/MS/MsAM/2012-6-9_16426_anna.64x64.jpeg Anna's Avatar

    Anna

    Teacher, writer, biologist

    Satisfied Customers:

    270
    Great research skills, variety of work experiences, teaching experience.
  • http://ww2.justanswer.com/uploads/PD/pdheslin/2012-6-6_232056_pambig.64x64.jpg pdheslin's Avatar

    pdheslin

    Consultant

    Satisfied Customers:

    51
    20+ years of internet site creation and search engine optimization. Dozens of search tools at my disposal.
 
 
 

Related Tax Questions