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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I received a £110,000 additional taxable income on top of my

Customer Question

I received a £110,000 additional taxable income on top of my normal self employed income of £42,000 net before tax
My accountants just added it all together and i paid £52000 in tax.
I had paid nothing into pensions in the last 4 years still earning on average £42,000 net before tax.
Surely they should have put £60000 into a pension to take me under the £100,000 thresh hold. which would have reduced my tax to £21000. I also with being over 55yrs could have took the pension tax free some of £15000 straight away..
So in essence I could have paid £21000 in tax added £29000 to tax saved put into a pension took £15000 tax lump sum and the whole thing would have cost me £14000 and left me with a £45,000 pension pot. Does this look right
Submitted: 7 months ago.
Category: Tax
Expert:  TonyTax replied 7 months ago.

Hi.

You say you are self-employed. What was the source of the additional £110,000? When did you accountant become aware of this sumand when in the tax year was it paid?

Customer: replied 7 months ago.
The accountant came aware in May 2014 when received, the current tax year, year end March 2015. The money received was a payment payment from the bank in connection with a IRHP claim. The HMRC may it quite clear that this money was to be declared as taxable income for the current year and could not be used against previous years. So my first thought was I had to get under the the £100,000 band. My total income for that year was £151,000, so to me we should have put at least £60,000 into a pension which would have put me under the £100,000 . This now seems as though I received terrible advice
Customer: replied 7 months ago.
Bear in mind I am not a accountant , now I realise (to late) there were probably other ways to get under that £100000 barrier.
Expert:  TonyTax replied 7 months ago.

Thanks.

IRHP payments are taxable as income if the original product was sold to you in a business capacity as opposed to in a personal capacity in which case Capital Gains Tax might apply.

Assuming it should be treated as business income, you could have made a pension payment but that's a decision for you, not your accountant. However, it's disappointing that the accountant wasn't pro-active in suggesting tax mitigation ideas, even if he or she referred you to an independent financial adviser. Unless an adviser has made a technical error which has cost you financially, you will be hard pressed to force them to pay compensation even if you reported the matter to their professioanal body, assuming they are regulated by one, because of the nature of your complaint.

Pension contributions cannot be backdated so there is no way of reducing the liability that way. The only other ways of getting some of the tax back was via high risk investment in Seed Enterprise Investment Schemes or Enterprise Investment Schemes but the investment would have had to have been made in 2014/15 or 2015/16. As we are now in 2016/17, that opportunity has gone but it may not have been something you would have considered in any event.

I'm sorry I cannot suggest a solution but let me know if you have any further questions.

Customer: replied 7 months ago.
I did ask them during 2014 how to reduce this income and nothing was offered. I also put 2 solutions to them and both were rejected, one was a pension contribution.
My understanding now is I could have put £40,000 in a pension, allowance for that year, also as I paid no pension in previous 3 years I could have brought forward another £20,000 to add to the £40000. The net cost after taking into account the tax saving would have been about £14,000 . However after withdrawing the tax free lump sum from the new pension I would have had a £45,000 pot in a drawdown pension. I agree they should have pointed me to to a IFA, which they have in house, however nothing was suggested at all. We actually had a meeting in the summer of 2014 in connection with future tax advice and nothing was suggested what to do with this money. Oh by the way this question is x 2 as my wife received same amounts and advice. I may ring you on this if you feel it would be better.
Expert:  TonyTax replied 7 months ago.

There should be no need for a phone call and, in any event, it would involve you paying a further fee.

Frankly, I find it odd that the accountant told you that you could not or should not pay a pension contribution especially in light of the fact that they have an house IFA. Maybe they thought that the IRHP payments were not to be treated as trading income and, therefore, are not pensionable income. You should ask the accountant why your ideas were "rejected", why they had no ideas of their own to mitigate the tax and why you weren't referred to their IFA.

Once this matter is ended one way or the other, you should consider changing your accountant.

Expert:  TonyTax replied 6 months ago.

Hi.

I'm just following up to find out if my answer helped or if you have any further questions.

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