“My wife and I have decided to carry on trading in my company, can I defer my state pension? If I can, what are the effects on my pension payments?”
Brian and Mary are a married couple who run a business. They decided to defer their state pension for a few years.
Both Brian and Mary retirement dates were March 2016 and July 2016 respectively. Mary’s retirement date is only a few months after Brian’s despite their age gap of almost two years, with Brian being the eldest. This is because of regulations that were introduced to harmonise pensions of men and women.
You can check your own retirement date by using the government calculator.
Because Mary’’s state retirement date was after 5th April 2016, the effect of deferring is that she will get a higher weekly amount of pension. Brian could also have opted for getting a higher pension as a result of deferring. However, because Brian’s retirement date was before 6th April 2016, he had the choice of a pension of a lump sum.
Taking a lump sum from your pension
This lump sum otherwise known as a ‘social security pension lump sum’ has a specific piece of legislation for taxing it. The legislation says that the lump sum is income but shouldn’t be included in the individual’s total income so ultimately it has no impact on how the rest of your income is taxed. The tax rate applied to the lump sum is via a two-step method:
- Calculate Brian’s income after relief of losses personally, share loss relief, relief for gifts for qualifying investments such as charities and personal allowance. So the reliefs that Brian enjoys being a small business owner still remain in tact.
- If the income amount had been nil after the first step calculation, then no tax will be paid on the lump sum. However, if the amount doesn’t exceed the basic rate limit (set as £34,500 for 18/19), the the lump sum would be taxed at 20%. If the income exceeds the basic rate limit but not the higher rate limit (£150,000 in 18/19), it would be taxed at 40%. If the result exceeds the higher rate limit then Brian would have paid 45% on the lump sum. These calculations would have been different if Brian was a Welsh or Scottish taxpayer.
So the effect of Brian taking out a lump sum without advice could have incurred a hefty tax bill.
But because Brian told us well in advance that he was going to get a lump sum, we were able to minimise the tax on and ensure by minimising declared income his income for the year, so as to enjoy only a 20% tax rate.
If you need help making the most of the tax reliefs available to you as a small business, please get in touch.
Written by Shaima Todd