Tag: Pension

Can you justify your pension contribution?

The maximum pension contribution is £40k per year and if you haven’t used the allowance in previous years there is a 3 year carry forward of unused contributions.

Most business owners pay this as a company contribution, that should save corporation tax as its a tax deductible expense.

However, does the contribution comply with

BIM46035 – Specific deductions: pension schemes: wholly & exclusively: controlling directors & shareholders

S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009

A pension contribution by an employer to a registered pension scheme in respect of any director or employee will be an allowable expense unless there is a non-trade purpose for the payment.

One situation where all or part of a contribution may not have been paid wholly and exclusively for the purposes of the trade is where the level of the remuneration package is excessive for the value of the work undertaken by that individual for the employer. In this situation, you should consider whether the amount of the overall remuneration package, not simply the amount of the pension contribution, was paid wholly and exclusively for the purposes of the employer’s trade.

steve@bicknells.net

What impact does earning over £100k have on my tax code and pension allowance?

Many people don’t realise the impact of earning over £100,000.

Here are a couple things you need to know

Personal Allowance – Tax Code

Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £125,000 or above.

You’ll also need to do a Self Assessment tax return.

Pension Allowance Reduction

To work out if you have a reduced (tapered) annual allowance for a tax year, you’ll need to work out your:
# net income in that tax year
# pension savings in that tax year
# threshold income in that tax year
# adjusted income in that tax year

If your adjusted income is over £150,000 your annual allowance in the same tax year will be reduced.

It will not be reduced if your threshold income for that year is £110,000 or less, no matter what your adjusted income is.

For every £2 your adjusted income goes over £150,000, your annual allowance for that year reduces by £1. The minimum reduced annual allowance you can have is £10,000.

Whichever type of pension scheme you’re in (for example, a career average scheme), you’ll need to know your pension savings so you can work out both your:

# threshold income
# adjusted income

If the pension savings made in the tax year are more than your available annual allowance, you should include the excess amount on your Self Assessment return. Your available annual allowance is your reduced annual allowance plus any unused allowance from the previous 3 tax years.

This amount is added to your taxable income and you will pay Income Tax on it, at the tax rate that applies to you.

The adjusted income includes your pension contributions and for final salary or career schemes pension contributions are the increase in scheme value

steve@bicknells.net

Why would you put commercial property into a pension scheme?

property investment, 3D rendering, grunge metal stamp

Pensions are highly tax efficient and you can purchase Commercial Property, the main examples of types of property your pension could buy are

  • Industrial units
  • Offices and shops
  • Farmland and forestry
  • Public houses
  • Nursing homes
  • Hotels
  • Marine berth

The things you can’t buy are residential property, holiday property, caravans, beach huts, basically, if you can live in it then it will probably be difficult to put it your pension.

If your business owns its premises or you have mixed property investments where you can title split to separate the commercial from the residential it could well be worthwhile to move the commercial property into a pension scheme (SIPP or SSAS).

The tax benefits are:

  1. When you or your business contribute to your pension scheme the contributions are tax free – for individuals they will will get back tax at 20% and can claim additional tax relief on their self assessment return, for companies they can save 20% corporation tax
  2. When the property is in the pension scheme there isn’t any tax on the rental income or capital gains tax if you sell the property
  3. When you retire you could get 25% of your pension tax free

Other benefits include:

  • Your business could use cash tied up in the premises to invest in trading activities or for other investments
  • Pensions are normally outside of the scope of inheritance tax
  • It will ring fence your property from your other activities

In summary to move your business premises from your business to a SIPP or SSAS pension you would do the following:

  • Find a lender prepared to lend a third of the property value to your pension scheme  (which will be half the value of the fund ie if the property was valued at £300k, your pension could borrow £100k which is 50% of the £200k which will need to be funded by your pension scheme)
  • Have the premises independently valued and rent assessed and appoint solicitors
  • Create a SSAS or SIPP pension (you can include other people in your SSAS or SIPP investments)
  • Transfer into your SSAS or SIPP any funds you have in other pension schemes
  • As you are the business owner and its your pension scheme your business could make a payment into your pension scheme (pension contributions are tax deductible), the maximum for the last 3 years would be £120k (£40k + £40k + £40k) see details of NRE
  • You could make a personal payment to your pension and if you are a higher rate tax payer your will get a tax refund via your self assessment return
  • Then your pension scheme buys the premises from your business and rents it back to the business

steve@bicknells.net

Is this the end for Pension Inspecie Transfers?

Buildings in the isometric

An inspecie transfer is generally either a transfer of property from a company/individual or pension scheme to a pension scheme.

These are relatively common and usually occur between different Small Self-Administered Schemes (SSASs) and/or Self-Invested Personal Pensions (SIPPs), otherwise known collectively as Investment Regulated Pension Schemes.

Of course an investment regulated pension scheme is under no obligation to accept an in specie transfer. The trustees of a SSAS and the scheme administrator of a SIPP will review the offered asset to make sure that:

  • a proper market valuation has been made
  • it’s suitable for the investment strategy of the scheme

Inspecie transfers generally create tax refunds, just as they would have done had they been a cash contribution which is tax free or tax deductible for companies.

However, according to Citywire 18th Aug 2016, HMRC have decided they don’t like Inspecie Transfers

In recent weeks the tax man has challenged pension providers over the practice of in specie transfers which allow people to put non-cash assets into their retirement plans. Provided strict criteria are met, individuals can claim back tax relief on the transfers just as they would with a normal contribution into a pension.

Neil MacGillivray, chairman of the Association of Member Directed Pension Schemes’ (Amps), told Citywire’s New Model Adviser there was a ‘very strong possibility’ HMRC could ask for tax relief back on contributions stretching back to 2009. This would have significant ‘financial costs’ for individuals and pension providers he said.

I can’t see why HMRC have an issue with these transfers? why does it matter whether the contribution is inspecie or for cash?

steve@bicknells.net

 

Have you Auto Enrolled your employees in a Pension?

group of successes people

Over 100,000 small and micro employers reach their staging date by the end of the year.

So what do you need to do before you stage?

  1. Find out your staging date, this the date when your obligation under Auto Enrolment will start, the Pension Regulator calculator is a good place to start
  2. Nominate a person to be the Pension Regulators key contact and register their name with the Regulator
  3. Draw up a Project Plan and consider whether you need help (60% of companies currently staging have decided they do need help! and most businesses will start by asking their accountant to help with project management)
  4. Choose a Pension Provider – Nest, Now Pensions and The Peoples Pension are the 3 largest

The fine for small employers with 1 to 4 staff who fail to comply with an EPN is £50 per day and for those with 5 to 49 it is £500 per day.

The Pension Regulator statistics for the first quarter of 2016 show that the number of fixed penalties were 806 compared to the penalties for the whole year of 2015 which were 1,250, so penalties are increasing, partly due to increasing numbers of small businesses being required to enrol.

The Pensions Regulator (TPR) has highlighted the following problem areas:

  1. Employer forgeting to do the declaration of compliance within 5 months of staging, many employers wrongly assumed that registering on the Government Gateway was enough.
  2. Confusion caused by running multiple payrolls for the same employer for example weekly and monthly
  3. Completing the declaration of compliance but without choosing a pension provider
  4. Omitting self employed workers who have a contract to provide work personally

 

steve@bicknells.net

How does a lifetime ISA work?

Budget 4

The Budget announced that from 6 April 2017 any adult under 40 will be able to open a new Lifetime ISA. They can save up to £4,000 each year and will receive a 25% bonus from the government on every pound they put in.

This is why you should get one!

  1. 25% Bonus – free money is always good
  2. It encourages you to save – building up savings for a house or retirement will definitely be of benefit
  3. The under 40’s will probably see this as better than a pension plan, as you can’t access pensions until you are 55

Personally Pensions are still my favourite…

Lets say you invest £10,000 per year of earned gross income, increasing each year by 3% for inflation and see the effect of tax relief at 40% and 20%, assuming a return on the investment of 7% (which you should get with Commercial Property Investment)

40% Tax Rate 20% Tax Rate
Year Pension No Pension % Diff Year Pension No Pension % Diff
1 £10,700 £6,252 71% 1 £10,700 £8,336 28%
2 £22,470 £12,954 73% 2 £22,470 £17,272 30%
3 £35,395 £20,131 76% 3 £35,395 £26,841 32%
4 £49,564 £27,808 78% 4 £49,564 £37,078 34%
5 £65,077 £36,013 81% 5 £65,077 £48,017 36%
6 £82,036 £44,773 83% 6 £82,036 £59,698 37%
7 £100,555 £54,119 86% 7 £100,555 £72,158 39%
8 £120,754 £64,081 88% 8 £120,754 £85,441 41%
9 £142,761 £74,692 91% 9 £142,761 £99,590 43%
10 £166,715 £85,987 94% 10 £166,715 £114,649 45%
11 £192,765 £98,000 97% 11 £192,765 £130,667 48%
12 £221,070 £110,771 100% 12 £221,070 £147,694 50%
13 £251,801 £124,337 103% 13 £251,801 £165,782 52%
14 £285,140 £138,740 106% 14 £285,140 £184,987 54%
15 £321,285 £154,024 109% 15 £321,285 £205,365 56%
16 £360,445 £170,233 112% 16 £360,445 £226,978 59%
17 £402,846 £187,416 115% 17 £402,846 £249,888 61%
18 £448,731 £205,621 118% 18 £448,731 £274,161 64%
19 £498,358 £224,901 122% 19 £498,358 £299,868 66%
20 £552,006 £245,309 125% 20 £552,006 £327,079 69%

Even when you consider:

  • Your money is locked up till you are 55
  • You pay tax when you take money out of the pension
  • You can get 25% out of the pension tax free

The difference in growth is massive

If you do salary sacrifice you can increase the tax effect by saving national insurance too.

steve@bicknells.net

A few quick tips on how to save IHT

Signing Last Will and Testament

There are lots of things you can do to save inheritance tax.

Pensions

IHT only applies if the pension company has to pay the value of your scheme to your estate, in which case it becomes like any other asset, but generally the pension pot is held in a discretionary trust, which means it isn’t taxed on death.

You can now nominate anyone not just dependents to be the beneficiary.

How a Family Pension Scheme will save you Tax

Potentially Exempt Transfers and Lifetime Gifts

The original owner must live for 7 years after giving the gift. Any gifts made less than 7 years before death count towards the Inheritance Tax threshold (£325,000). They count towards the threshold before the rest of the estate.

If the donor gave away more than £325,000 of gifts in their final 7 years, tax is due on everything over that threshold.

Gifts made 3 to 7 years before the death

The rate of tax is reduced for gifts over the threshold made between 3 and 7 years before the person died. This is known as ‘taper relief’.

Annual Exemptions

The estate doesn’t pay Inheritance Tax on up to £3,000 worth of gifts given away by the deceased in each tax year (6 April to 5 April). This is called the ‘annual exemption’.

Leftover annual exemption can be carried over from one tax year to the next, but the maximum exemption is £6,000.

Certain gifts don’t count towards the annual exemption and no Inheritance Tax is due on them, eg gifts worth up to £250 and wedding gifts.

Wedding gifts

There’s no Inheritance Tax on a wedding or civil partnership gift worth up to:

  • £5,000 given to a child
  • £2,500 given to a grandchild or great-grandchild
  • £1,000 given to anyone else

The gift must be given on or shortly before the date of the wedding or civil partnership ceremony.

Gifts up to £250

There’s no Inheritance Tax on individual gifts worth up to £250. You can give as many people as you like up to £250 each in any one tax year.

You can’t give someone another £250 if you’ve given them a gift using a different exemption, eg the £3,000 annual exemption.

If you give someone more than £250 in a tax year, the whole amount counts – the first £250 is not exempt.

steve@bicknells.net

Thank you Mr Osborne – we like pensions the way they are!

This is exactly how I pictured the partners lounge

Hooray!!!

On the 5th March George Osborne announce that he would drop the changes that were proposed on 20th January 2016.

The changes that had been proposed were…

The ISA idea

Currently you get tax relief when you pay into pensions and pay tax when you take the money out (after taking 25% tax free), the plan under discussion is to change that so that taxed income goes in and growth in the fund is tax free, like ISA’s.

I think we can all agree the current system is much better, I can’t see that making pensions like ISA’s will encourage investment

Flat Rate Tax Relief

The other plan under discussion is to introduce a flat rate of tax relief on contributions into pension schemes, this would replace the current system where tax relief is based on the actual tax rate you pay.

The BBC explained how this might work

At the moment, basic rate taxpayers receive 20% tax relief, higher rate taxpayers receive 40%, and those with the highest incomes receive 45%.

It is thought that this system could be replaced with a flat rate of anything between 25% and 33%.

Millions of high earners would lose out in such a system, but basic rate taxpayers would stand to gain.

http://www.bbc.co.uk/news/business-35360978

Pot of gold coins isolated on white

Pensions are a fantastic way to save tax…

Inheritance Tax

IHT only applies if the pension company has to pay the value of your scheme to your estate, in which case it becomes like any other asset, but generally the pension pot is held in a discretionary trust, which means it isn’t taxed on death.

You can now nominate anyone not just dependents to be the beneficiary.

Since 6th April 2015 anyone who inherits a pension fund from a person who dies before the age of 75 is entitled to receive it tax free and the you can take the money as a lump sum or income. Once over 75 a special tax of 45% applies (previously 55%), you could reduce this by taking a regular income. The tax rate should drop again in April 2016.

Business Premises

Your pension can own Commercial Property, including your own business premises.

In many cases it is better for business premises to be owned by the business owners pension fund because:

  1. The object of the business is not to own its own property, the objective should be for the business to make profits from trading
  2. The business could use cash tied up in the premises to invest in trading activities
  3. Pensions are a very tax efficient method of ownership – no capital gains, no tax on rental profits
  4. Company Pension Contributions are Tax Deductible and Individual contributions get income tax refunds
  5. You may be able to use 3 year Carry Forward to get funds into your pension scheme

Commercial Investment Property

Your pension scheme can own commercial investment property – shops, offices, industrial units.

It can borrow up to a third of the value of the pension scheme.

There is no capital gains tax and no tax on the rental income.

In Specie Transfers

In Specie transfers can be used to move assets into your pension scheme this could incur capital gains and SDLT (Stamp Duty), but you will benefit from tax relief as if you had paid in cash. Currently that means at tax relief of between 20% and 45%.

Once the assets are in a pension scheme transfers ‘in specie’ between schemes are tax free (no capital gains) and no SDLT.

HMRC say…

In our view the assumption by the transferee fund or by the trustees of the transferee fund, of obligations to provide benefits is not chargeable consideration.

Net Relevant Earnings (NRE)

Many owner managed businesses only pay small salaries and take large dividends, this would normally restrict the level of pension contributions allowed, however, their companies can pay the maximum allowed – currently £40k per year.

Employer v’s Employee Pension Payments (Net Relevant Earnings)

Lend Money to your Pension Scheme

If you have a SSAS or a SIPP Pension you will probably want to invest some of your funds in Commercial Property – Shops, Office, Industrial Units. Pension funds can borrow money and with the current interest rates low and yields as high as 10%, you can increase your return and use less cash by borrowing.

But one thing you may not know is that connected parties can lend to the fund…

Trustees of registered pension schemes may sometimes wish to borrow funds, for example to enable them to purchase an asset. There is no objection to a registered pension scheme borrowing funds for any purpose providing that the scheme administrator/trustees are satisfied that the borrowing will benefit the scheme and that the borrowing is within the rules laid down by the Department for Work and Pensions (DWP).

A registered pension scheme is treated as borrowing or having a liability of an amount, if that amount is to be repaid or met from cash or assets held for the purposes of the pension scheme.

A registered pension scheme may borrow funds from any individual, company or financial institution whether or not they are connected to the scheme, but any borrowing from a connected party which is not made on commercial terms will be subject to a tax charge – see RPSM04104020 .

http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm07104010.htm

This is useful where you have paid in the maximum allowed pension contributions but you still have cash, so you could lend to your pension to buy a property.

25% Tax Free

When you retire you get 25% of you pension fund tax free.

http://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/tax-and-the-cash-lump-sum

Shares and Loans

SSAS Pensions can lend money to their scheme employer and the scheme employer can borrow from a SSAS subject to passing 5 tests.

steve@bicknells.net

What types of property can a SIPP or SSAS Pension invest in?

Buildings in the isometric

Pensions are highly tax efficient and you can purchase Commercial Property, the main examples of types of property your pension could buy are

  • Industrial units
  • Offices and shops
  • Farmland and forestry
  • Public houses
  • Nursing homes
  • Hotels
  • Marine berth

The things you can’t buy are residential property, holiday property, caravans, beach huts, basically, if you can live in it then it will probably be difficult to put it your pension.

Buying a commercial property can be a great investment opportunity, I have been investing in property since 2002 as part of a small pension syndicate of friends and family we are currently invested in an Office Block and 6 Retail Units, we also bought some properties into separate companies and did originally have HMO’s too.

The yield on commercial property is often around 8% to 10% and you can borrow into your pension to help fund the purchase.

Your business can rent a commercial property from you and many owner managed businesses have transferred company owned premises to a SIPP or SSAS.

There have been some very interesting deals done for example

From a music studio in Costa Rica to a yacht berth in the south of France, Sipp (self-invested personal pension) providers report an ever-growing list of exotic assets being bought with pension money to fund investors’ dream business ventures.

Yacht de luxe.

For aviation-mad Tony Fowler, a property developer from West Sussex, the acquisition of a 50pc stake in the Isle of Wight airport through his Sipp means he can fulfil his passion for flight while at the same time investing for his retirement.

Plane and Airport Flat Design Illustration Icons Objects

“A friend and I have paid half each of the total purchase cost of £635,000,” he said. “I was delighted when I found I could use money in my pension to buy the airport. It had been taken over by the receivers and was going to be closed down, but now it is being renovated and improved. We like to think it will bring something to the local economy as well.”

http://www.telegraph.co.uk/finance/personalfinance/pensions/10451405/How-I-bought-an-airport-with-my-pension.html

steve@bicknells.net

Contact Us

 

Pension Tax Changes expected soon

fictitious newspapers

On the 20th January 2016…

David Gauke, the Financial Secretary to the Treasury, said a review of pension taxation would keep savers in mind.

“We need to ensure it is effective in terms of encouraging saving, and it is going in the right place,” he said.

Basically there are 2 changes under review..

The ISA idea

Currently you get tax relief when you pay into pensions and pay tax when you take the money out (after taking 25% tax free), the plan under discussion is to change that so that taxed income goes in and growth in the fund is tax free, like ISA’s.

I think we can all agree the current system is much better, I can’t see that making pensions like ISA’s will encourage investment

Flat Rate Tax Relief

The other plan under discussion is to introduce a flat rate of tax relief on contributions into pension schemes, this would replace the current system where tax relief is based on the actual tax rate you pay.

The BBC explained how this might work

At the moment, basic rate taxpayers receive 20% tax relief, higher rate taxpayers receive 40%, and those with the highest incomes receive 45%.

It is thought that this system could be replaced with a flat rate of anything between 25% and 33%.

Millions of high earners would lose out in such a system, but basic rate taxpayers would stand to gain.

http://www.bbc.co.uk/news/business-35360978

So that could be great news for basic rate tax payers!

steve@bicknells.net

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