Technical Q&A examines tax on pension contributions and capital gains tax for a property owner
Q My client has annual income of about £27,000 from pensions and property (rental). He also takes regular annual withdrawals of £9,500 from a single premium UK bond, which gives rise to a chargeable event gain (CEG) of £4,500 each year.
He is planning to sell a rental property, which will give rise to a capital gain of £35,000. How do the tax charges on the CEG and capital gain impact on each other?
In general, capital gains ‘sit on top’ of all other income and any top-sliced chargeable event gains under life assurance policies to establish the rates of capital gains tax (CGT) chargeable on the capital gain.
‘All other income’ in this case amounts to £27,000. As the client had a CEG in the previous tax year, the fraction for top-slicing relief is one. This means that £4,500 has to be added to £27,000 before making the CGT calculation.
The position then is that after the CGT annual exemption of £12,300, £22,700 of the capital gain will be taxable.
After deduction of the personal allowance, £19,000 income (£31,500 less £12,500) falls within the basic rate tax band of £37,500. This leaves £18,500 of the basic rate tax band available. Some £18,500 of the capital gain therefore falls within the basic rate tax band and is taxed at 18%, with the balance of £4,200 being taxed at 28%.
Please note that there needs to be a payment on account of CGT in respect of the residential property within 30 days of the sale completion. The gain will also need to be returned in the self-assessment return, with any adjustments then being made.
Q My client has PAYE income of £8,000 and dividend income (from his own business) of £60,000. He has not used all of his pension allowances, so makes a £6,400 net contributions to his personal pension, on which £1,600 basic rate tax relief is given on a ‘relief at source’ basis.
Does he qualify for ‘higher rate’ relief on the pension contribution by virtue of the fact that his dividend income makes him a higher rate taxpayer and, if so, how would this be calculated?
Before the pension contribution is paid, the client’s dividend income will be taxed:
- £4,500 at 0% (personal allowance)
- £2,000 at 0% (dividend allowance)
- £35,500 at 7.5% (basic rate tax band)
- £18,000 at 32.5% (higher rate tax band).
The grossed-up pension contribution will extend the basic rate tax band to £45,500. This means that £8,000 of the dividends that were subject to higher rate tax will now only be subject to basic rate tax – a tax saving of £2,000 (25% of £8,000).
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