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Tax on lump sum following State Pension deferral

State Pension deferred - lump sum due. If no taxable income, but Gift Aid payments, still taxable?

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Client has deferred his State Pension past his 65th birthday in 2013 as he was and is a higher rate taxpayer. A large lump sum could be claimed. He is now going to stop trading and sell his surveyor's practice. He is a generous man and would wish to reward his staff with a sizeable bonus in addition to their redundancy entitlements. I have explained that the tax that would apply to the lump sum would depend upon his tax rate. He has a number of Gift Aid payments and if his income were no longer taxable, HMRC would demand 20% on these. It is my belief that this 20% is NOT his taxable liability but a clawback of the tax deemed to have been deducted from any Gift Aid payments. As such, I would not expect the lump sum to be taxable if his income was less than his allowances. What do others think? 

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By Wanderer
15th Oct 2018 12:18

Just dealing with a similar situation.

Running the figures through our tax package this DOESN'T make the pension lump sum taxable.

Not saying that's right though! Have a good read of online filing exclusion 87 as this is at least one example where HMRC's calculations don't work with gift aid & pension lump sums.

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By Tim Vane
15th Oct 2018 12:26

The gift aid payments will be charged to tax at step 7 of the calculation so will not affect the tax rate on the lump sum. But I disagree with the above post that the lump sum is not taxable; I think it is taxable but at a zero rate because the step 3 income is zero. See s7 FA(2) 2005.

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By carnmores
15th Oct 2018 15:48

defer the pension for another year and then it will be taxed less as long as the tax rate in year of deferral is basic

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Replying to carnmores:
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By sammerchant
16th Oct 2018 13:07

Yes, but if the taxpayer divests himself of all his practice income in the year of cessation (by payments to staff and after overlap relief) his tax rate could theoretically be zero! Worth thinking about.

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Replying to sammerchant:
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By carnmores
16th Oct 2018 13:13

Precisely

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By emanresu
17th Oct 2018 15:08

Surely HMRC would demand income tax on the basis that the claimed Gift Aid payments were invalid?

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Replying to emanresu:
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By sammerchant
18th Oct 2018 15:16

No, you are not claiming Gift Aid on the payments. You are reporting that you have made payments under Gift Aid. If it turns out that you have zero tax to pay, HMRC will demand the tax that you are deemed to have deducted from the payment you made to the charity.

Businesses cannot always guarantee that they will turn a profit. I had just such a case a few years back when a sizeable bad debt nearly wiped out a small trader.

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Replying to sammerchant:
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By emanresu
18th Oct 2018 17:33

sammerchant wrote:

No, you are not claiming Gift Aid on the payments.

That isn't what I wrote.

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By carnmores
18th Oct 2018 17:53

Quite username!

i would hope that the real issue is the tax on deferred state pension, gift aid is optional and i refer to Tim reply above

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Replying to carnmores:
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By emanresu
18th Oct 2018 19:23

carnmores wrote:

Quite username!

i would hope that the real issue is the tax on deferred state pension, gift aid is optional and i refer to Tim reply above

Well decrypted!

Oh, quite so. Tim's step 3 point ended the need for further debate of the lump-sum situation - leaving the rum issue of Gift-Aid and zero tax

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