.png)
.png)
Missed opportunity
The following letter was to the article’s author, Isaac Delestre, but copied in the editor-in-chief of Taxation.
Dear Isaac,
You have written a very interesting article and made some valid points (Missed opportunity, Taxation, 14 November 2024).
I should, however, like to raise something that I feel you have not considered, which, in my mind, justifies the 25% tax free lump sum.
At the point of retirement, much of the value of a fund has accrued from accumulated dividends and capital gains. In the case of dividends, a higher rate taxpayer would have paid, perhaps, 34% income tax on such income (assuming not from capital saved in an ISA) and just 9% if a basic rate taxpayer. Coming out of a pension, converted into an annuity or by drawdown, the effective tax rate on these dividends is either 20% or 40%.
In the case of capital gains, not only would an individual have an annual exemption for gains ‘in the open’ (admittedly now much diminished), but the CGT rate was 10% or 20% (now 18% and 24%), significantly below the income tax rates charged after retirement.
In my opinion, the tax-free lump sum mitigates the harshness of this.
Kevin Preston FCA TEP, director,
Amherst & Shapland Limited.
Can relief be obtained through self assessment?
I submitted queries 20,365 and 20,071 which concerned a client who had both self-employed and employed income and where I was concerned to ensure that she did not pay excessive National Insurance contributions.
The responses to the more recent query (Taxation, 1 August 2024) indicated that the self-assessment system did not permit adjustments to be made to the overall class 4 liability and that a separate claim would have to be made, as per the guidance in the National Insurance Manual, as referred to in Matt Crawford’s reply. Although much of the guidance was easy to follow, things did get rather complicated in the middle – no doubt, a consequence of the complexity of the rules themselves.
I therefore decided to file the tax return on the basis that class 4 contributions were payable on all of my client’s self-employed profits (minus the lower earnings limit) and, once that had gone through, then turn to the NIC claim once I had more time to deal with such matters.
Fortunately, and much to my surprise, the HMRC computer overrode my own class 4 calculation and made adjustments to take into account the class 1 contributions that had been paid, although there was no indication how the adjustments were calculated. Curiosity did get the better of me and I called the self-assessment helpline to get some further pointers. The woman I spoke to was extremely patient and helpful although she too found the numbers confusing. However, she did refer me to the help notes for HMRC’s calculation pages (tinyurl.com/hmrctaxcalcsumntes) and in particular section 15.
This was based on the same guidance as referred to by Matt Crawford subject to the following two points:
- First, the fact that these notes contain numbered boxes etc helps the guidance to make a little more sense where the words alone got rather confusing.
- On the other hand, the notes state (at step 5) ‘multiply the result of step 4 by 9%’. If one tries to understand the underlying logic of this step, this is a somewhat surprising development. However, when one refers back to the original guidance, it becomes clear that the rubric should read ‘divide the result by 9%’.
Having worked through these help notes, I can see that the HMRC computer has indeed reached the correct answer. (It fortunately knew to divide and not multiply.)
I do, however, have one remaining question: the calculation guide proceeds on the assumption that employment income was earned evenly across the year, whereas the income pattern was more lumpy. As a result, the actual contributions paid were higher than the amount for which credit was given in the calculation. The difference is tiny and not worth pursuing. However, out of interest, which figure should be used if one were to follow the rules strictly?
Planner.
Contact us
Please email your feedback contributions to taxation@lexisnexis.co.uk. Letters may be added to Taxation.co.uk as comments to articles. We reserve the right to edit letters or only use extracts.
