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Life Time Allowance and additional tax

Practical Issues
taken2often
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Life Time Allowance and additional tax

#319737

Postby taken2often » June 19th, 2020, 11:47 am

I am coming up to 75 and may have to pay some LTA tax . Normaly this is taken from the pension account by the provider. I want to pay the tax out of other funds rather than have to sell stock whilst the value is reduced. I am told this is not allowed, so I will be fighting that.

But what came up was the fact that in the tax form SA101 Ai page 4 questions 8 and 9 I have to advise how much over the LTA I was and then how much tax the provider had paid on my behalf. Now the rate is 25%. Will this mean the total over the LTA be added to my other income and end up forcing me into a higher tax rate.

Anyone know

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Re: Life Time Allowance and additional tax

#322417

Postby Snowbadger » June 28th, 2020, 11:43 pm

Hi T2O,
as far as I understand you are assessed and pay 25% on the excess over the LTL. After that anything you withdraw is taxed as normal with any other taxable income. I can see they wouldn't want you to pay the tax from other sources as that would be more advantageous to you.

Good luck,

SB

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Re: Life Time Allowance and additional tax

#322436

Postby GrahamPlatt » June 29th, 2020, 6:54 am

Speaking from a position of complete ignorance, but since as you say the capital has been devalued by recent events, are you still above the LTA . Really, what I am asking here is how/when is the LTA determined.

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Re: Life Time Allowance and additional tax

#322443

Postby Chrysalis » June 29th, 2020, 8:12 am

Each time you ‘crystallise’ more pension an LTA calculation is performed to work out how much LTA you have used up. You only pay LTA excess charge once you encounter the first benefit crystallisation event which takes you over 100% of the LTA.

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Re: Life Time Allowance and additional tax

#322498

Postby ursaminortaur » June 29th, 2020, 11:08 am

Chrysalis wrote:Each time you ‘crystallise’ more pension an LTA calculation is performed to work out how much LTA you have used up. You only pay LTA excess charge once you encounter the first benefit crystallisation event which takes you over 100% of the LTA.


Or as in this case you reach age 75 with uncrystallised funds or funds which were put into flexible drawdown which have since grown. LTA tests are mandated in those conditions and will result in an LTA excess charge if that takes you over the limit. In the case of testing the growth at 75 of the pot which was already in flexible drawdown no new money is actually crystallised at that point though it is still referred to as a BCE.

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Re: Life Time Allowance and additional tax

#322767

Postby parallellines » June 30th, 2020, 1:30 pm

taken2often wrote:I am coming up to 75 and may have to pay some LTA tax . Normaly this is taken from the pension account by the provider. I want to pay the tax out of other funds rather than have to sell stock whilst the value is reduced. I am told this is not allowed, so I will be fighting that.

But what came up was the fact that in the tax form SA101 Ai page 4 questions 8 and 9 I have to advise how much over the LTA I was and then how much tax the provider had paid on my behalf. Now the rate is 25%. Will this mean the total over the LTA be added to my other income and end up forcing me into a higher tax rate.

Anyone know


No risk of being moved into a higher tax bracket, there's no link between the LTA calculation or LTA tax rates and assessment of earnings for tax bands.

As regards the first paragraph, the provider is required by HMRC to account for the tax, so you'll get nowhere with this. Just use the "other funds" to invest back into the market if you want to stay fully invested.

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Re: Life Time Allowance and additional tax

#322999

Postby taken2often » July 1st, 2020, 2:47 pm

Thank you for your responses. I think that there was a misunderstanding about the LTA tax of 25%. What appears to be the case is say you had an LTA excess of 50k. The provider has paid 25% tax 12.5k. I then enter this in my tax form 50k and 12.5 k. Say my normal income is 25k so my taxable charge is now 75k so I am now in the 40% tax bracket. £What you would call a double whammy.

The problem about paying the LTA tax from funds out with the pension is that about 100% are paid from the fund as they may not have other capital available. So there is a perception that this is the only way. So far the Provider has not stated the exact rule that states the tax has to come from the fund. The Pension Office do acknowledge that your pension is usually damaged (reduced) by payment of the tax, but do say exceptions can take place.

The reporting by the Provider is simple The value of the fund on the 75th birthday less the LtA allowance this gives the excess work out the tax due at 25% quote the sum due. No mention of source Tax is Tax. The provider has a number of weeks to pay this tax and send me a report confirming the LTA Test and results. The Test is a one off. The provider thinks that if they accept the tax from me after the test I would have to pay tax on the tax.

HMRC HS345 Guidance for the technical reader the first 9 pages out the 28 are relevant. Bold statement who pays this tax. Me the pensioner and the Provider it is joint liability. One of the main reasons why the providers wish to take it out the funds they control.

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Re: Life Time Allowance and additional tax

#323016

Postby TedSwippet » July 1st, 2020, 3:57 pm

taken2often wrote:So far the Provider has not stated the exact rule that states the tax has to come from the fund.

https://www.gov.uk/hmrc-internal-manual ... /ptm086000
Joint and several liability
Joint and several liability means that both the scheme administrator and the member are equally and separately liable to the whole charge, and that payment by one will discharge the liability of the other(s), to the extent of the amount paid.

To meet their obligation, the scheme administrator must pay and account to HMRC for any lifetime allowance charge that arises in respect of any scheme member at a BCE taking place under their scheme. They do this through online quarterly scheme returns - see PTM162100. But if they fail to do this because they have acted on incomplete or incorrect information provided by the member, they may be discharged from their liability to the tax charge where they can show and HMRC accepts that it would not be just or reasonable for them to be liable for it. In that case, liability for the charge would fall solely on the member - see below.

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Re: Life Time Allowance and additional tax

#323018

Postby scrumpyjack » July 1st, 2020, 4:04 pm

Surely it is better for the payment to be made out of the pension fund rather than out of already taxed personal funds. If the money was kept in the pension fund and then subsequently paid out it would be taxed as income?

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Re: Life Time Allowance and additional tax

#323101

Postby taken2often » July 1st, 2020, 10:20 pm

To Scrumpyjacks question

There are a few answers to your question. In the guidance HMRC acknowledge that the pension will be damaged by paying this tax out of the fund. This in fact means that an existing running pension will be reduced. Which will effect say widows and partners for many years especially if they are in a defined pension that may reduce by 50% on the death of the main pensioner.

At present my pension pot has been greatly reduced due to the current situation. So to sell stock to pay tax now is a lot worse than it would have been in say January. So If I had cash elsewhere it is more sensible to use this.

The tax would come from my taxable portfolio, so rather than invest it, which I would then pay tax on the income, a better use is to pay the LTA tax.

By reducing my assets in the taxable area I will then save IHT when I die

HMRC do give you the option of Self Deliverance at 74.75 years where there is great benefits, but as I have no terminal illness, that is off the table at this time.

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Re: Life Time Allowance and additional tax

#323271

Postby TedSwippet » July 2nd, 2020, 2:27 pm

taken2often wrote:The tax would come from my taxable portfolio, so rather than invest it, which I would then pay tax on the income, a better use is to pay the LTA tax.

Given that HMRC requires the pension provider to pay the LTA charge before allowing you to access the balance, even if it was sensible to do so, it doesn't seem like you're going to be able to achieve your goal of paying the LTA penalty with other cash (though please come back and let us know if you do). If you want to keep whatever stocks you hold in your pension, your next best bet is probably to use the non-pension cash you would have used to pay the tax to instead re-invest in whatever you sell (or is sold for you) in the pension to pay the LTA charge. This leaves you in the same investment situation as if you had paid the tax from outside the pension, just with some assets now outside rather than inside the pension.

Also, have you considered simply withdrawing enough normally and taxably from the pension to avoid the LTA charge entirely? You will face tax on this at your marginal rate, but this is unlikely to exceed the tax rate you'd face when taking the LTA charge into account and then later paying ordinary tax on the remainder. This does of course reduce the utility of pensions as an IHT bypass.

Your view of how the LTA charge falls out of self assessment seems ... off. My reading of things is that you would declare £50k (say) on SA101 as subject to the LTA penalty at BCE5, and also show that the pension administrator had paid £12.5k (say) from the pension to cover the 25% LTA charge, leaving you nothing more to pay. Assuming you don't actually withdraw it, but just leave it in the pension, this £50k or whatever excess over the LTA doesn't feed into your actual income for the year, so no double-dipping by HMRC, and no push into higher tax brackets. The way the LTA charge works is: 25% on the amount over at BCE, and then normal tax on the remaining 75% when actually withdrawn (which may or may not be contemporaneous with the BCE).

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Re: Life Time Allowance and additional tax

#323301

Postby taken2often » July 2nd, 2020, 4:23 pm

Reply to Ted Swippet. Thanks for your message

As I have no ISA allowance left I would have to buy in my Taxable account. Not so good

If there is no extra tax to pay why put it in the SA101. My accountant thinks I may be right. Most people would like to think that the 25% is a one off but HMRC are sneaky.

Regards

Bob

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Re: Life Time Allowance and additional tax

#323369

Postby TedSwippet » July 2nd, 2020, 7:23 pm

taken2often wrote:As I have no ISA allowance left I would have to buy in my Taxable account. Not so good

I agree that an ISA would be the ideal place for it. However, your tax rate on gains inside a pension that is above the LTA almost certainly exceeds your tax rate even on a plain unwrapped account.

If in basic rate tax, you lose 25% plus 20% of the remainder, for 40% on gains inside a SIPP, and if in higher rate tax, 25% plus 40% of the remainder, for 55% on gains inside the SIPP. Compare to 7% on dividends and 10% on capital gains in a plain unwrapped account for basic rate, and 32.5% on dividends and 20% on capital gains in a plain unwrapped account in higher rate tax. In all cases, the tax bite on gains in a SIPP above the LTA exceeds the tax bite on gains in unwrapped accounts.

The countervailing forces are: money not in a SIPP is subject to IHT; and gains roll up tax-deferred in a SIPP. On the latter, if you hold stocks long-term and use your annual capital gains allowance fully, you can mostly defer or avoid capital gains tax, leaving only the drag from income tax on dividends.

If you run some projections you will be able to see how long it might take for the tax-deferral in the SIPP to overcome the higher rate from being above the LTA. I did this, and for me the best case (earliest) breakeven is age 95, but only if I make no pension withdrawals until then. Not a close call at all; my plan is to take enough money out of my pensions to entirely avoid any and all LTA charges.

taken2often wrote:If there is no extra tax to pay why put it in the SA101.

Presumably to cover the odd cases where the provider hasn't been able to make the charge correctly, probably due to incorrect information passed to them by the scheme member.

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Re: Life Time Allowance and additional tax

#323526

Postby taken2often » July 3rd, 2020, 2:19 pm

To TedSwippet

Thanks for your response, a wee bit more information for you. I will never draw on my Sipp pension or any other. I still have my full PCLS allowance which I keep in reserve just in case. There is no tax due after LTA in the pension as far as I know. Tax will be taken when someone draws on the fund but it will depend on how much and what their tax rate will be after they draw. The beauty of this is that you can leave a number of people a substantial sum to kick of their pensions if they are sensible through Nomination.

I do not think you can avoid LTA tax. Each time you draw, including lump sums you are now given a percentage that it represent of the LTA. They all add up until you reach 100%. If over tax will be due on the excess.

I still think there is extra tax. It is cheeky it implies you have just had a bonus, some tax paid and it all rolls up.

Bob

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Re: Life Time Allowance and additional tax

#323536

Postby ursaminortaur » July 3rd, 2020, 3:18 pm

taken2often wrote:To TedSwippet

Thanks for your response, a wee bit more information for you. I will never draw on my Sipp pension or any other. I still have my full PCLS allowance which I keep in reserve just in case. There is no tax due after LTA in the pension as far as I know. Tax will be taken when someone draws on the fund but it will depend on how much and what their tax rate will be after they draw. The beauty of this is that you can leave a number of people a substantial sum to kick of their pensions if they are sensible through Nomination.

I do not think you can avoid LTA tax. Each time you draw, including lump sums you are now given a percentage that it represent of the LTA. They all add up until you reach 100%. If over tax will be due on the excess.


That is true if you drawdown using UFPLS. However if you crystallise early enough with flexible drawdown then although there is an LTA test at the time of that crystallisation withdrawals then only attract taxation at your marginal rate and the test at age 75 being just on the growth left in the crystallised pot at that point means that using up more of your LTA limit can be avoided by withdrawing that growth. If you don't need that extra income then you can gift it to your beneficiaries by making regular gifts out of excess income to avoid IHT.

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Re: Life Time Allowance and additional tax

#324582

Postby taken2often » July 8th, 2020, 1:44 pm

Reply to ursaminortuar Thank you for your response. I am really not sure about your point. As you know they have made this a very complicated subject. As had no interest in Draw down I have not taken much notice. So this could be as much feeling as fact.

If at 65 you decided as many do to take the PCLS and they are 100% of the full current LTA then Tax would be paid on the excess.
I do not think there is any more tax to pay even at 75.

Another way of looking at it someone in a defined benefit pension now has a LTA test and they multiply the pension by 25 years and then add on the PCLS . If under the LTA allowance,no tax.

I understand that it is only remaining uncrystallised funds below the 100% of LTA that triggers the LTA at 75

Bob

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Re: Life Time Allowance and additional tax

#324602

Postby TedSwippet » July 8th, 2020, 3:22 pm

taken2often wrote:If at 65 you decided as many do to take the PCLS and they are 100% of the full current LTA then Tax would be paid on the excess. I do not think there is any more tax to pay even at 75. ... I understand that it is only remaining uncrystallised funds below the 100% of LTA that triggers the LTA at 75.

Not so. Research BCE 5A. From Royal London:
BCE 5A – where someone reaches age 75 having already started drawdown.
This BCE is triggered if there are still drawdown benefits to be paid out. The amount that is tested is the difference between the value of the fund at age 75 less the amount originally crystallised.

Obviously making withdrawals from the drawdown fund would result in a lower level of growth or no growth at all. However the withdrawals themselves will be liable for income tax, possibly at a 40% or even 45% rate.

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Re: Life Time Allowance and additional tax

#325187

Postby TedSwippet » July 10th, 2020, 2:46 pm

Perhaps a simple BCE 5A example will help to show a possible effect of this test at age 75.

Suppose Alice has a pension that she fully crystallised when the LTA was £1m, using 100% of her LTA. She took £250k in PCLS, and left £750k invested in drawdown. Over the years this has grown by £100k to £850k. Alice's 75th birthday is tomorrow. For simplicity, she has no other taxable income in the current tax year (living off her ISA, say).

  • Today: She can withdraw the £100k excess, and she will pay tax on this £100k as if income. Her tax bill will be £27,496, leaving her with £72,504 net and £750k still in drawdown. On her 75th birthday tomorrow, the BCE 5B LTA test finds no excess in the drawdown pension, so no LTA penalty.
  • Tomorrow: The BCE 5A LTA test applies. Alice has no LTA remaining. The pension administrator remits 25% of the £100k excess in the drawdown pension to HMRC as an LTA charge, so Alice's drawdown pension drops by £25k. To leave £750k still in drawdown, she can now withdraw only £75k, giving a £17,496 tax bill and leaving her with £57,504 net.
Waiting until after age 75 has cost Alice a full £15k net, compared to what she could have achieved if she acted just one day earlier, and before age 75.

Phasing drawing down the excess above the initial £750k drawdown pension over more years would normally provide even better results for Alice. Suppose she started a year earlier, so as to withdraw the £100k excess over two years, £50k each. This results in total tax of around £15k, leaving her £85k net and nearly £27.5k better off than if she had waited for BCE 5A to apply.

Clearly there will be many more moving parts to a real situation than this. Not least, other income and inheritance tax considerations, for example. However, this illustrates just how damaging and also perhaps unexpected the BCE 5A test can be. It's definitely something to plan for, rather than to passively accept. It might be that even after checking out all the angles, including IHT issues, paying it is the lesser evil under some circumstances. But you at least want to be clear that yours is one such situation.


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