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