Neil MacGillivray

Head of Technical Support

Seven pension contribution

planning opportunities

For Financial Advisers and Financial Planners only

2

01. 40% tax creep

02. 60% tax penalty

03. 50% tax planning opportunities

04. More for less – salary sacrifice

05. The benefit in kind trap

06. Corporation tax reduction

07. Let your kids contribute to your pension!

Contents

40% tax creep

• Increase in number of clients becoming higher rate tax payers

• This practice continues as we approach a £10,000 personal allowance?

• HMRC estimate number of higher rate tax payers will increase from 4M to 5M over next two years

• Are your clients aware?

• Tax relief at 40% makes pensions more attractive

£0.00

£5,000.00

£10,000.00

£15,000.00

£20,000.00

£25,000.00

£30,000.00

£35,000.00

£40,000.00

£45,000.00

£50,000.00

08/09 09/10 10/11 11/12 12/13 13/14

Basic Rate Band

Personal Allowance

Example based on individual

• Basic rate taxpayer

– Having £11,280 net (£14,100 gross) pa income available to

invest.

– Return of £5% gross (4% net)

• Higher rate taxpayer

– Having £11,280 net (pension contribution of £15,040 net of basic

tax = £18,800 gross) pa income available to invest

– Return of 5% gross (3% net) pa

40% tax creep

Summary of investment return

Type of investment Value at end of 20 years - basic rate

Value at end of 20 years – higher rate

Deposit account

ISA

Pension

£344,768

£386,372

£482,965

£308,604

£386,372

£643,954

6

• Where individuals ‘adjusted net income’ exceeds £100,000, personal

allowance reduced by £1 for every £2 over the £100,000

– Marginal rate tax of 60% for income between £100,000 and £116,210

– With personal allowance due to increase to £10,000, higher

proportion of income will be caught by 60% rate

– Pension contributions reduce ‘adjusted net income’ so relief at 60%

available

60% tax penalty

7

• 50% additional rate to reduce to 45% in 2013/14

• Maximise pension contributions using any carry forward now!

• One off opportunity – use it or lose it!

• Take the planning one step further……

50% tax planning opportunities

50% tax planning opportunities

Example

£100,000 gross contribution to a SIPP in 2012/13. Assume marginal rate of tax

relief is 50%, there is no annual allowance charge and the contribution would not

be caught by the recycling legislation. Therefore net contribution = £50,000

Benefit Gross Amount Net Amount

(40% tax)

Net Amount

(45% tax)

PCLS £25,000 £25,000 £25,000

Drawdown fund £75,000 £45,000 £41,250

Total £100,000 £70,000 £66,250

Flexible drawdown conditions met in 2013/14 tax year

Assume impact of charges and investment return results in no change in the fund value

9

Example

• In tax year 2012/13, employee

– Earns £49,000

– Pays £2,400 net pension contribution

• Employer costs

– Employer NIC due £5,729 (£49,000 - £7,488) x 13.8%

– Total cost £49,000 + £5,729 = £54,729

More for less – salary sacrifice

10

Example

£

Salary 49,000

Income tax due

£8,105 @ 0% 0

£34,370 @ 20% (6,874)

£3,000 @ 20% (600)

£3,525 @ 40% (1,410)

NIC due

£7,605 to £42,475 @ 12% (4,184)

£42,475 to £49,000 @ 2% (130)

Income after tax & NIC 35,802

Net pension contributions (2,400)

Net spendable income 33,402

Salary sacrifice

11

What if employee sacrificed £3,103 of salary …..

Salary sacrifice

12

Example

£

Salary 45,897

Income tax due

£8,105 @ 0% 0

£34,370 @ 20% (6,874)

£3,422 @ 40% (1,369)

NIC due

£7,605 to £42,475 @ 12% (4,184)

£42,475 to £45,897@ 2% (68)

Income after tax & NIC (no change) 33,402

Salary sacrifice

13

• Prior to salary sacrifice

– Personal pension contribution £2400 net

– Amount invested in pension £3,000

• After salary sacrifice

– Employer pension contribution of £3,103

– Possible to enhance by employer NIC saving £428

– Total pension contribution of £3,531

– 17.7% increase

• Someone on income of £40,000 making net contribution of £2,400

– Sum invested in pension £3,000

– Under salary sacrifice total contribution could be as high as £4,016

– 34% increase

Salary sacrifice

14

• Benefit in kind - 52% penalty

– Higher rate tax payer with benefits in kind could be subject to tax at

40% & NI at 12%

– The same combined rate of tax & NI as individual earning £150,000

• Example

– Employee earning £43,475 with company car with benefit in kind

value of £4,105

Benefit in kind trap

15

Benefit in kind trap

£4000

@ 0%

£7,605

@ 0%

£34,870

@12%

£34,370

@ 20%

£5,105

@ 40%

£1,000

@2%

£4,000

@ 0%

£30,765

@ 32%

£3,605

@ 20%

£4,105

@ 52%

£1,000

@ 42%

Income Tax NIC Combined

16

• Consider benefits of

– Pension contribution or

– Salary sacrifice

Benefit in kind trap

17

Corporation tax reductions

2014/15 2013/14 2012/13 2011/12

Small company rate

£0-£300,000

20% 20% 20% 20%

Marginal rate

£300,001-£1.5M

21.25% 23.75 25% 27.5%

Main rate

More than 1.5M

21% 23% 24% 26%

18

• Rate of corporation tax to continue to go down

– Chancellor aims to reduce main rate to 20%

• Incur deductible expenditure now – pension contributions

– Get relief at the higher rate

– Requirement to meet the ‘wholly & exclusively’ test

Corporation tax reductions

19

• The new Child Benefit Income Tax Charge (CBITC)

– Will effect 1.2m families*

– Claims trigger NI credit where children under 12, so claim 2 part

mechanism

– Claim, but choose not to receive it

– Effective from 7 January 2013

• Impacts individuals with ‘net adjusted income’ of over £50,000

– CBITC will equal 1% of child benefit received for every £100 on

income above £50,000

– Pension contributions reduce ‘adjusted net income’

– For 2013/14 individual with 2 children with adjusted net income of

£60,000 could get effective relief of 57.52% on pension contribution.

* HM Revenue & Customs

Let your kids fund your pension!

20

• Mr Brown has income of £54,000. His wife is a low earner and she claims

£1,752 in child benefit in respect of their two children.

• CBITC £54,000 - £50,000 = £4,000/£100 := 40%

£1,752 x 40% = £700.80 tax charge

• If Mr Brown made a net contribution of £3,200 (£4,000 gross) his ‘net

adjusted income is reduced to £50,000

Higher rate tax relief £800.00

Basic rate tax relief £800.00

CBITC saved £700.80

£2300.80

£2,300.80/£4,000 = 57.52% relief

Let your kids fund your pension!

Conclusion

• Tax planning opportunities for all income tax levels

• Don’t assume tax saving impact, work it out – the results may be better than

expected

• For more generic assistance on any tax, trust or pension issues please

contact the Technical Support Unit on

• Tel – 0845 600 8651

• E-mail - pensions.techsupport@jameshay.co.uk. taxtrust.techsupport@jameshay.co.uk.

22

DISCLAIMER

This report has been prepared by James Hay Partnership. The information included in this presentation has been obtained from sources considered reliable.

Although reasonable care has been taken to ensure that such information is neither uncertain nor incorrect at the time of publication, it should not be

considered as totally accurate or complete. Under no circumstances does the information or the analyses it may contain guarantee future earnings on or

returns from investments. Before taking any investment decision, the recipient should have an appropriate understanding of the possible risks entailed in the

contracting of the service(s) and/or product(s) contained in the presentation, bearing in mind his/her personal and financial circumstances.

If such risks are not appropriately understood, or if any doubts exist, we recommend that the recipient should abstain from contracting such product(s) and/or

service(s). James Hay Partnership expressly excludes all liability in respect of errors or omissions in this information. James Hay Partnership or the affiliates

of IFG Group, their directors or employees, may at any time hold a position or a direct or indirect interest in securities, financial instruments and issuing

institutions that may be mentioned in this document, where applicable.

This report may not be used, reproduced, distributed or published by any recipient hereof it without the express consent of James Hay Partnership or IFG

Group.