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£50,000 Tax Saving - Case Study

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Background

A long standing client, Bob, is a successful business owner. His main pension plan is just now coming into payment and so he’s been prompted to think ahead about retirement – probably five years or so.

He’s taking about £100,000 pa from the company, a mixture of salary and dividend. He doesn’t actually need all of this income day-to-day, but his longer-term financial plans mean that it’s important to extract this money from the business before he retires and passes the business on.

However he’s not completely content: he sees that for almost every pound from the company, a combination of corporation tax and dividend tax means an overall tax burden of 40% – and because of the loss of Bob’s his personal allowance, some the money he draws will be at an effective marginal rate of 60%.

The Planning Recommendation

Bob already has pensions in payment of about £25,000 a year and he doesn’t want to commit any more to retirement income.

  • Setting up a new pension plan, originally with the intention of taking advantage of flexible drawdown, but now replaced by the new ‘Pension Freedoms’.
  • Reducing his drawings by £30,000, and instead (as a company premium), paying £30,000 a year into the new pension, for the next five years

Fast Forward Five Years

It’s time to take the money (now standing at £150,000, ignoring any investment growth or losses, and charges).

  • Of course, Bob can take a quarter as a lump sum. However at this point Bob’s salary will have stopped leaving a good tranche of basic rate tax band. With the remaining £112,500, he can choose to take a series of lump sums within the basic rate band, extracting all of the money in about six years.
  • If he wanted it sooner, he could encroach into the higher rate band at the expense of some extra tax.
  • If taken within the basic rate band, the tax burden drops to just 15%, compared to roughly 50% before, a tax saving of £52,500.
  • It’s also worth noting that if Bob were to die before age 75 then his family would receive the entire pension fund without any income tax or inheritance tax deduction: a further valuable benefit.

Conclusion

The purpose of the strategy is to slash Bob's tax burden. To us though, the most important lesson from Bob’s story isn’t the application of technical expertise, so much as really listening to our client. The most important step is always the first: to sit down and look at things from every angle.

This case started in order to take advantage of the Flexible Drawdown rules but is now even more beneficial under the new ‘Pension Freedoms’ and the abolition of the 55% death tax before age 75.

Note, this case study was based on Rowley Turton's understanding of the rules at the time, and is an example of our work only. This case study is not individual advice, and you should obtain individual professional advice based on your own personal circumstances, and the current rules, before undertaking any action. Rowley Turton accept no liability for anyone taking any action as a result of this case study or any other information on our website.

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