Pensions tax, CGT tax. And stuff

2BToo

Woo - Hoo! This is the first post in this part of the forum! I've never done this before - it feels like diving into a swimming pool with a completely smooth surface, or being the first to walk on a beach when the tide has gone out!

OK, childish excitement over, down to business ....

This thread is to pick up on a discussion on PH which went as follows:

--ME--

Tax question.

I have a long-standing investment in a GIA, which will be eligible for CGT when I take money out of it (i.e it's crystallised). I've been bed-and-breakfasting diligently but the lowering of the CGT threshold of late hasn't helped, and it doesn't take a genius to foresee CGT rises with the new administration.

My wife has a part-time job with PAYE income (I don't). Combined with charitable giving she is a fair bit below the higher rate income tax threshold. Would it be possible to withdraw an amount from the GIA (held in my name) to a joint bank account but also make a contribution to my wife's personal pension of the same amount, thus netting off the tax liability from the capital gains with a tax refund on the payment into the pension? I am aware that the tax liability would need to be paid now (i.e at the end of this fiscal year) and the tax refund would go into the pension so they wouldn't balance each other out immediately.

Would this be possible / allowable / sensible?

Thanks.

-- PM3 --
Perhaps you overthink .

You : Take money from GIA ( pay CGT as usual ate end of tax year )

Give money to your wife ( there is no tax liability either way doing this )

She can put ( assuming suitable qualifying earnings ) into HER pension ( and get the relief )

The End.

-- Nik --
You could also consider that transfers between spouses are CGT free. They are treated as "no gain no loss" the gain effectively transfers to the spouse so on disposal the gain is still assessed but it is now against the receiving spouse so their CGT allowance is used and any CGT payable is at the receiving spouses rate.

Nik is certainly on here and I wouldn't be surprised if PM3 is too, so many thanks for your suggestions back in July.

I now need to do this. And I'm not looking for advice; I'm looking for a better understanding of how pension contributions work. Mrs 2BToo earns £49k / year and pays into an NHS pension. I have no salaried income but we both have a (small) income from a rental property and give to charity. These more than cancel each other out this means that 2BToo is some way below the higher rate income tax threshold. We live entirely on Mrs 2BToo's income.

We have a GIA each which will mean big CGT bills when we take money from it. We've been paying into it for some time and it's done well, so the amount would cause quite a lot of CGT pain, which we'd like to avoid. The plan outlined on PH was that we take (say) £10k from the GIA and pay £10k into her pension. The GCT tax bill would cancel out the pension tax relief and we'd end up neutral. However a couple of questions arise:

If we were to do this then we'd have to declare Capital Gain on her tax return, meaning we'd have to pay the relevant amount of tax to HMRC on the 30th Jan (or whenever). We're comfortable with this.
If we were to do this then we'd also presumably have to declare Mrs 2BToo's pension contribution on her tax return. Where would the tax relief come - would it be paid back to us or would it be paid into the pension (effectively becoming a bigger pension contribution)? She's not a higher-rate tax payer, which I think its relevant. The answer to this would dictate whether we'd need to take some more money out of somewhere to meet the tax we'd have to pay on the Capital Gain in point 1 above.
What would happen if I was to pay some money into a pension? I am not an income tax payer at all (although I pay a small amount of tax on the income from the property.) I think that I get tax relief on tax that I haven't paid - is that correct? If this is the case then would it be more tax-efficient for us to pay some of that GIA gain into a pension for me as well as a pension for my wife? How should this be split - i.e up to what point would I get tax relief?

Thanks for any light anyone could shed. I suspect that the answer to this is a simple calculation for someone who understands the in's and out's of tax, which I don't. If it's easier to point me to a web page which explains all these things in small words then I can do the maffs myself.

? Offline

Nothing to add, but I have dreamed about becoming a 'kept man'.....

Well done, sir!

2BToo

@ferret50 said in Pensions tax, CGT tax. And stuff:

Nothing to add, but I have dreamed about becoming a 'kept man'.....

Well done, sir!

Thanks Ferret. It's funny how little time you have when you don't have a job, but I really don't know where I'd fit one in now. I always tell people that I'm unemployed and that when I get bored with it I'll retire, but the truth is that I seem to be working eight days a week; some of them helping run a church; some of them with family; some of them guiding a family business; some of them helping other folks who need assistance. It's just that none of these things pay a wage!

Anyway, back to the question - can anyone help?

Nik Burrows

Hi 2BToo

Any CGT due needs to be reported by 31st December and paid by 31st Jan so for a gain in 24/25 tax year it needs to be reported by 31/12/25 and paid by 31/01/26

As a basic rate tax payer the tax relief will be paid into Mrs 2BToos pension if the contributions are paid into a Personal Pension or SIPP.
You say she pays into the NHS pension. You would need to look at the "input allowance" used up by this scheme. For a F/S scheme the contribution isn't the amount that you pay in, it is calculated based on the amount of benefit you gain. With the NHS there is 1995 and 2015 schemes so it's a little more work but happy to help, just drop me a message. This needs to be done to ensure you don't over contribute.

You can pay £3,600 gross so £2,880 net into a pension. This gives you a £720 of your CGT back!

Hope this helps

Nik

Ronski

@Nik-Burrows said in Pensions tax, CGT tax. And stuff:

You say she pays into the NHS pension. You would need to look at the "input allowance" used up by this scheme. For a F/S scheme the contribution isn't the amount that you pay in, it is calculated based on the amount of benefit you gain. With the NHS there is 1995 and 2015 schemes so it's a little more work but happy to help, just drop me a message. This needs to be done to ensure you don't over contribute

My wife works for the NHS, presumably on the 2015 scheme as she started working for them after that date. We pay some into a SIPP she holds with you. She earns around £25k, how much can she contribute to the SIPP or is it far more complicated and would be better off messaging you.

Thanks

Nik Burrows

@Ronski

Hi Ronski

Drop me a PM and I'll do some calculations for you.

Cheers

Nik

Ronski

@Nik-Burrows I would, but I can't find the option to send you a PM.

PM3

https://forum.cobensdirect.co.uk/post/6

Ronski

@PM3 thanks, but as Nik had said a PM that's what I presumed he meant, a PM on a forum is a personal message sent within the forum.

I'll email him.

Nik Burrows

@Ronski

Apologies Ronski. i used PM but e-mail is the option.

Cheers

Nik

2BToo

@Nik-Burrows said in Pensions tax, CGT tax. And stuff:

Hi 2BToo

Any CGT due needs to be reported by 31st December and paid by 31st Jan so for a gain in 24/25 tax year it needs to be reported by 31/12/25 and paid by 31/01/26

As a basic rate tax payer the tax relief will be paid into Mrs 2BToos pension if the contributions are paid into a Personal Pension or SIPP.
You say she pays into the NHS pension. You would need to look at the "input allowance" used up by this scheme. For a F/S scheme the contribution isn't the amount that you pay in, it is calculated based on the amount of benefit you gain. With the NHS there is 1995 and 2015 schemes so it's a little more work but happy to help, just drop me a message. This needs to be done to ensure you don't over contribute.

You can pay £3,600 gross so £2,880 net into a pension. This gives you a £720 of your CGT back!

Hope this helps

Nik

Nik,

Thanks. This helps a lot. It's what I needed to know.

Some follow-on questions come up. Mind if I ask them? Thanks!

It turns out that my wife isn't contributing to an NHS pension and hasn't done for four years. (This is because she was on a final-salary scheme but reduced her hours and changed jobs to a lower grade, and to continue on the final-salary scheme with this lower salary would negatively affect the pension when it arrives. Apparently she needed to keep out of the NHS pension scheme for five years and then re-start in order that this problem doesn't occur). She has made some contributions to her IM (private) pension in this time.

Our aim is to reduce our tax bill. The means of achieving this is to crystallise a gain from a GIA and pay this into a pension for my wife, and the tax costs will balance each other out - as already described.

I understand that she can bring forward unused pension allowance from up to three previous years. Presuming that this is the case then:

What is her 'pension allowance' for these previous three years? I understand that it is the total sum of her salary for these years? Is the amount she can bring forward as simple as: total salary for three years MINUS contributions already made? She earns about £40,000/year, should this be relevant.
Everyone has a personal income tax allowance of £12570, this being the amount of income you can earn before you pay income tax. If my wife was to pay all of her salary into a pension then would she obtain tax relief on all of this income, or just the proportion above £12750 (i.e the proportion she has paid tax on)?
My wife has a GIA and a pension with IM. Can she move money directly from her IM GIA to her IM pension or will she need to move the money out into her bank account and then pay it back into her pension?
You said that "You could also consider that transfers between spouses are CGT free. They are treated as "no gain no loss" the gain effectively transfers to the spouse so on disposal the gain is still assessed but it is now against the receiving spouse so their CGT allowance is used and any CGT payable is at the receiving spouses rate."

If I was to crystallise a gain from my GIA and pay this into her pension then how would this need to be noted on both her and my tax returns?

Thanks again for your help. If it's easier then do eMail me, or I can call you at a convenient time to discuss the details.

Nik Burrows

@2BToo

1, Carry forward needs two considerations, the amount you can carry forward and the amount that you will gain tax relief on.
After using all of this years allowance, £60k - any pension contributions, you go back three years so to tax year 21/22 Allowance £40k - any contributions,
then 22/23 £40k - any contributions and then 23/24 £60k - any contributions.

Based on what you have said no contributions have been made for the last 4 years so you could make a contribution of £200k in tax year 24/25
Part 2 is what you will gain tax relief on. You will only get tax relief on contributions up to 100% of your earnings in the year of contribution. So with earnings of £40k p.a. while she could make a contribution of £200k you will only get tax relief on a gross contribution of £40k

2, You get tax relief on the whole contribution

3, Yes you can move funds from GIA to pension. At the bottom of your account overview there is a transfer between product option

4,You would record and pay the CGT as part of your tax return, Mrs 2BToo will get the tax relief on her pension contribution paid into her pension, claimed by the provider based on earnings of £40k. You would pay £32k and the provider will claim £8k making the total contribution £40k.

Happy to set a call and run through this if it will help, just drop me a message.

Cheers

Nik

2BToo

Nik,

Thanks. I've sent you an eMail to your Cobens Direct eMail address.

2BToo

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.

? Offline

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!

Nik Burrows

@2BToo

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

2BToo

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.

Ronski

@2BToo said in Pensions tax, CGT tax. And stuff:

And I hope that a certain Mrs Reeves doesn't read this

Best get it in before the end of the month

2BToo

That'll happen, for sure. It's what happens next year and beyond that is in question ....

? Offline

@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.