Pensions tax, CGT tax. And stuff
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Guys,
Following on from a very helpful telephone call with Nik (thanks again Nik) I think I've got to the bottom of what I would be sensible to do. In my case, with my having no income and my wife having income up to nearly the limit of Basic Rate tax, I'll take out as much from my GIA as she is paid in post-tax income, we'll pay that amount into her pension and the tax we pay on the crystallisation of the GIA gain will be balanced by the refund of income tax paid into her pension.
However as I have thought about it I think I have two further questions, as follows;
A. Mrs 2BToo has paid 20% tax on her income, but the money that I take out of my GIA will be taxed at 10%. Does this mean that we get back more in tax relief (from refunded income tax) than we pay in CGT?
B. If Mrs 2BToo receives tax relief on all of the money she has paid into her pension then does she not receive more tax relief than she has paid, given that she has only paid tax on the income above the personal allowance (£12750) ? This relates to Question 2 and Answer 2 in the above posts.
IF I understand things correctly then these two points will mean that we end up quite some way ahead on tax, non? (Note the 'IF' in this sentence - it's doing a lot of work.)
Thanks again.
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if it is of any help to your thoughts, 'er indoors current sole income is 'er
state pension. She has not, yet, started to draw from 'er SIPP, in fact she is paying in a nominal £100pm and this gains 'er a free £25 from Rachel Thieves!Winner winner chicken dinner!
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Guys,
Following on from a very helpful telephone call with Nik (thanks again Nik) I think I've got to the bottom of what I would be sensible to do. In my case, with my having no income and my wife having income up to nearly the limit of Basic Rate tax, I'll take out as much from my GIA as she is paid in post-tax income, we'll pay that amount into her pension and the tax we pay on the crystallisation of the GIA gain will be balanced by the refund of income tax paid into her pension.
However as I have thought about it I think I have two further questions, as follows;
A. Mrs 2BToo has paid 20% tax on her income, but the money that I take out of my GIA will be taxed at 10%. Does this mean that we get back more in tax relief (from refunded income tax) than we pay in CGT?
B. If Mrs 2BToo receives tax relief on all of the money she has paid into her pension then does she not receive more tax relief than she has paid, given that she has only paid tax on the income above the personal allowance (£12750) ? This relates to Question 2 and Answer 2 in the above posts.
IF I understand things correctly then these two points will mean that we end up quite some way ahead on tax, non? (Note the 'IF' in this sentence - it's doing a lot of work.)
Thanks again.
Good to catch up and glad that you found it useful
A) Yes you get more tax relief on pension contributions than you pay CGT. In this case as a basic rate tax payer it is, as you say, 10% CGT and 20% tax relief on contributions. So a £10,000 capital gain (after allowances) costs you £1,000 in CGT while a £10,000 pension contribution actually gains you £2,500 in tax relief (the 20% relief is calculated on the gross contribution)
B) Again yes she does, you are gaining tax relief on the £12,570 of income that no tax has been paid on, so as you say getting tax back that hasn't actually been paid.Cheers
Nik
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Nik,
Thanks. In that case then that small exercise sounds like it's a good way of saving a goodly chunk of tax. Why didn't I do it in years gone by?!?
(And I hope that a certain Mrs Reeves doesn't read this, for reasons that don't need to be explained.)
Thanks again.
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@2BToo For that, we have to rely on Nik to fully grasp Rachel Thieves intentions and find the loopholes!
But a Chancellor who takes pensioner's WFA without regard to Age Concern's comments is probably capable of devising a scheme of attacking SIPP's and ISA's as well.
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I feel stupid asking this, but here goes. Could someone work out an illustration just how salary sacrifice pensions and ordinary pensions work with regard to the 40% tax rate. I'm specifically thinking around the pension taking you below the 40% tax bracket, my brain is saying if the pension brings you under 40% then you wouldn't be able to claim the additional funds from HMRC and would that reduction negate salary sacrificing it, although monies would be in the market sooner?
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Not really a need for an illustration. If you Salary Sacrifice then your employer deducts from your wages prior to any tax and pays that into your pension. You didn't pay any tax so there is no rebate to be had. This is the case regardless of which tax bracket you may have fallen into. The gain in doing so is that you don't pay any National Insurance either (although this is set for change as well so may reduce the benefit)
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Thanks LP,
Very simply Salary sacrifice literally reduces your taxable income (incl NI) by the sacrificed amount so no tax is paid at source ergo there is nothing to reclaim.
Salary sacrifice
With salary sacrifice, there is nothing extra to claim from HMRC.
Your salary is reduced before tax is calculated, so you simply never pay the higher-rate tax on the amount you sacrifice.
For example:
Salary: £60,000
Higher-rate threshold (ignoring Scottish rates and assuming standard UK rates): about £50,270
You salary sacrifice £10,000
Tax now works as if your salary is £50,000.
You haven't paid any 40% tax on that £10,000, so there's no higher-rate relief to reclaim. It's already been given automatically. You also save National Insurance, and often your employer does too (some employers even add some or all of their NI saving into your pension). -
Just to add to this so the tax "advantage is clear"
In simple terms, so ignoring any NI for illustrative purposes
If you sacrifice £10k as Adam has shown above then £10k is paid into your pension
If you had taken it as salary then you would have received £6,000 and HMRC would have received £4,000