Pension LTA - should I exceed it?

[Snozzer]

I'm a company/owner director, already at the LTA limit. I've looked online, but can't find general advice.

I know withdrawals over the LTA are subject to tax at 25%.

But, If I continue to pay into the pension through the company, then I save 25% corporation tax (next tax year), so the net effect is zero. It seems like I'm missing something here as I then only pay tax at my marginal rate when I'm retired, which is less that what I'd pay as a dividend.

Am I missing something? Any advise from someone in a similar situation would be appreciated.

[Countdown]

Isn't there an immediate 25% charge when you exceed the LTA? AIUI your Pension Scheme Administrator will hand over 25% of the excess amount to HMRC. Then you would still pay income tax when you access your pension.

[Rufus Stone]

Withdrawals of uncrystallised excess is subject to a 55% tax charge.

[craig1912]

Countdown said:

Isn't there an immediate 25% charge when you exceed the LTA? AIUI your Pension Scheme Administrator will hand over 25% of the excess amount to HMRC. Then you would still pay income tax when you access your pension.

No I don’t believe there is an immediate charge. There is only a tax charge when withdrawals are in excess of the LTA and the charge is 25% if taken as income (so 65% if a 40% tax payer) and 55% if taken as a lump sum. These charges are on top of any other income tax. Lots of info here

https://adviser.royallondon.com/technical-central/...

[alscar]

I “ fixed “ my pot at whatever the limit was then back in 2014 knowing I then couldn’t pay anymore into the pot but instead took additional salary equivalent to my / company pension contributions which was then invested elsewhere by me.
I’m in my first year of drawdown income but know full well in 14 years time I will have an unpleasant amount of tax to pay.

[Snozzer]

craig1912 said:

No I don’t believe there is an immediate charge. There is only a tax charge when withdrawals are in excess of the LTA and the charge is 25% if taken as income (so 65% if a 40% tax payer) and 55% if taken as a lump sum. These charges are on top of any other income tax. Lots of info here

https://adviser.royallondon.com/technical-central/...

Yes, that's my understanding too, so I either pay the 25% corporation tax or put in my pension and pay the 25% on drawdown. Either way it's the same percentage, so then I get to control how much additional tax I pay based on my marginal rate, which will be lower when I retire. Plus the 25% 'extra' I'm paying into the pension is likely to grow.

[dingg]

You could always retire to Portugal and draw down the whole pot over 10 years at a 10% tax rate

[powling]

Any excess over the lifetime allowance (£1,073,100) is subject to the lifetime allowance tax charge when it is drawn. The rates of tax are 25% if taken as an income + income tax (20% / 40%) or 55% if taken as a lump sum.

There is a further 'test' undertaken at age 75 on the funds held, so there could be a further tax charge.

As always ... get advice which is bespoke to youself and your own circumstances.

Edited by powling on Friday 23 December 17:35

[Mitty33]

Just to be clear on the LTA tax charge (as there appears to be some confusion in previous posts).

You only pay the LTA charge after you have crystallised pension funds to the value of your LTA, or when you get to 75, whichever comes sooner.

When you Crystallise pension funds that are over your LTA you have two choices:

1. Place the funds into drawdown. In this case you pay a 25% LTA charge plus income tax when you withdraw the money. So if your marginal rate of tax when you withdraw is 20% then you pay 25% followed by 20% which is a total of 40%. If your marginal rate of tax when you withdraw is 40% then you pay 25% followed by 40% which is a total of 55% (not 65% as stated above). or

2. Withdraw the funds as cash. In this case you pay 55% LTA charge but no further income tax.

Whether to carry on saving when you have exceeded the LTA depends on circumstances. For many people the maths just makes sense. For example if you earn £125k per year the £25k that is over £100k will incur 40% income tax, 3% NI, and the loss of all your personal allowance, that's a marginal tax rate of 63%. In this case diverting the £25k into your pension means you'll be paying less tax, even if you are over the LTA. You just need to work out what makes sense in your personal tax position.

The LTA is currently £1,073,100.

Edited by Mitty33 on Thursday 22 December 16:17

Edited by Mitty33 on Thursday 22 December 16:18

Edited by Mitty33 on Thursday 22 December 18:55

Edited by Mitty33 on Thursday 22 December 18:57

[Snozzer]

Thanks for the replies. With the alignment of Corporation Tax and LTA drawdown surcharge, I think it makes sense to exceed the LTA in my case. It's frustrating that tax is so complicated!

[Mr Pointy]

You might want to email Nick IM at IM - see the sticky threads.
https://www.pistonheads.com/gassing/topic.asp?h=0&...