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LTA Excess Lump Sum

Bialystock
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LTA Excess Lump Sum

#452075

Postby Bialystock » October 21st, 2021, 6:14 pm

If you exceed LTA THERE ARE TWO OPTIONS …

(1) pay LTA tax of 25%, move the funds into drawdown and take income as required

(2) pay LTA tax of 55% and take the remaining 45% as a lump sum

For a higher rate taxpayer, there is no difference tax wise.

For a basic rate taxpayer, option (1) results in a higher net income.

Considering a basic rate taxpayer in receipt of child tax credits, every £1 gross of tax income results in a drop of 41p in tax credits.

Under option (1), if you have £100 in your uncrystallised pension, you then have £75 post LTA tax, £60 net of income tax but you lose 41% of £75 = £30.75 leaving you with £29.25.

Under option (2) would he have £45 because this lump sum is ignored for tax credits (so over 50% more) as it isn’t liable for income tax?

taken2often
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Re: LTA Excess Lump Sum

#452131

Postby taken2often » October 21st, 2021, 11:37 pm

The alternative to option 1) is to pay the tax. Leave the fund. If you still have PCLS available you draw what you need and pay tax on the 75% of the draw. There is a lot of ways to breach LTA, so each persons needs can be different. Another option available but not liked buy the providers is to provide the LTA tax from outside the pension. You may have lots of cash earning nothing so this may a good option. The interesting fact is that fter 75 you get no tax relief on payments into a pension So paying the tax from a contribution after the test date would be legal. The providers feel that your fund should be damaged and that is what HMRC expects. HMRC have no way of knowing or caring where the tax came from only that they get it from the Provider.
Just a thought if forced to sell stock to pay the tax, if your offer to pay the tax is refused you may have a claim for a projected loss over a period of 15/20 years may be more if the beneficeries wished to just draw the income after your death. Stock sold, income and growth lost.


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