Struggling to find an answer on this:
According to the pension company paperwork: Total pension benefits crystallised £1,200,000, LTA £1,030,000 and Lump sum of £400,000.
I understand that the tax-free element of the lump sum is capped at 25% of the LTA being £1,030,000 x 25% = £257,500. I also understand that the lump sum excess of £400,000 - £257,500 = £142,500 is then taxed at 55% = £78,375 and this has been deducted by the pension company. I believe the £142,500 and the £78,375 is then declared on the self assessment tax return and this will not give rise to any tax liability.
However, I am not clear about any disclosures, and tax due, in respect of the amount of £800,000 not taken as a lump sum.
As 25% of the LTA has been used against the lump sum, is only 75% of the LTA (£1,030,000 x 75% = £772,500) available against the £800,000 not taken as a lump sum? If so, what tax is payable on this? And what disclosures should be made in the SA tax return?
Hopefully the above gives sufficient information and thank you in anticipation if you can enlighten me (on the above would be a start and then on all the other things I keep learning that I need to learn!).
Replies (4)
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MC1, I've only ever covered this in theory so hope there are some financial advisers out there or fellow accountants who have come across this before, but I agree with your theory:
Excess over the LTA is £170,000 (£1.2m -£1.030m).
£142,500 of this is the taxable lump sum element, with tax correctly withheld at 55%.
The remaining £27,500 excess will be taken as income, so taxed at 25%, then further subjected to income tax at the normal levels. The pension provider may be able to tell you when the 25% tax will be applied.
This leaves £772,500 to provide (probably annual) taxable pension income, which will be taxed at the individual's usual income tax rates.
You may also just wish to double check that the client has not applied for Fixed Protection in the past.
My pleasure, just sorry I haven't come across this from a practical viewpoint before.
I agree with you re the boxes on page Ai4.
Presumably there is a P60 in respect of the annual pension (for page TR3 of the return) and the PAYE code should also give you the tax code being applied to the pension.
You may need to go back to the pension provider re the 25% tax charge, for boxes 8 &9 of Ai4. I have emailed the customer services departments in the past and they have been pretty helpful, even if they have to provide the info direct to the client.....Unless our fellow A-Webbers have other suggestions :).
This may be a stupid question, but since most people take 25% of their fund as a tax-free lump sum, £400k looks very much like the 'tax-free' 25% of (£1.2m + £400k). Have you checked that you're dealing with £800k not taken as a lump sum, rather than £1.2m not taken as a lump sum? Obviously, nowadays, you can take the whole pot and pay all the tax in one year, but the numbers in your example look suspiciously like somebody's taken their 25% and left 75% behind, rather than taking one-third. It may just be a coincidence, of course.