WHY PAY TAX – PENSIONS 02.09.13

Obviously we all have to pay tax so that the country can run and so that our politicians can decide to bomb countries like Syria or not as the case may be.I do not want to talk about aggressive tax planning here but to raise the first of 3 or 4 routes that are available that HMRC, HM Revenue & Customs, approve of with the aim of highlighting some lesser known aspects.

We all know that paying pension premiums saves tax at your highest marginal tax rate. However, what if you have a freehold property. Supposing you are a dentist with profits of £160,000. You have lost your personal allowance of £9,440 and are paying 45% on profits over £150,000. You can pay £50,000 in pension premiums this tax year and £40,000 in the next. Now a pension premium of £61,000 would get you your personal allowance back and make you a higher rate tax payer at only 40%..

There are two issues you say. Firstly I have not got nor do I want to tie up £61,000 in my pension and in any event wont I breach the annual limit of £50,000. That’s fine because you probably own part or all of a freehold surgery. So you can transfer a part interest in the surgery into your pension and with some changes to your pension which I have not the space here to explain you can avoid the £50,000 limit even if you have utilised all of the previous three years annual allowances. So instead of paying tax on £160,000 you pay it on only £99,000. A huge tax saving of £29,900. So instead of paying out £61,000 in pension premiums you shell out on legal fees and hey presto you have almost another £30,000 of disposable income tax free.

In the following year your practice pays rent and gets tax relief on the rent and your pension receives that rent tax free.