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The forthcoming budget is unlikely to bring much comfort to high rate tax payers. It seems very likely that changes will be made in tax legislation that will put a stop to some generous reliefs on pensions. The existing rules and reliefs when used creatively give rise to some very interesting outcomes.
High rate tax payers currently lose £1 of their personal allowance for every £2 of pay above £100,000.
So people earning £114,950 lose all of their personal allowance giving them a marginal tax rate of 60%.
However for high rate tax payers some very interesting results can be obtained when you use pension contributions to reduce your income.
So someone earning £114,950 could make a pension payment of say £11960 net into a personal pension.
This would have the benefits of:-
Grossing up, so the net payment of £11,960 would gross up to £14,950 (it normally takes two months for tax relief to be added.
However making this payment would reduce pay to £100,000 – thereby allowing full personal allowance and providing a tax saving of £2990.
The grossed up pension contribution can also be applied to reduce his personal tax payments by £2990.
So for a payment of £11,960 net the combined tax benefits are £8970 !
That’s not all if the taxpayer is age over 50 then it is possible to (at some point) withdraw the 25% tax free cash on the grossed up amount, enabling £3737.50 to be taken out of the pension. Meaning that the overall net cost of the exercise is only £8222.50.
However that would leave £11,212.50 remaining in your pension pot.
This type of creative tax and pension planning has a limited shelf life.
If you are a high rate tax payer and are worried about your existing tax planning strategy then please contact one of our Financial Planning Consultants, at Pareto Lawrence we offer both Financial and tax planning advice to corporate and private clients.