Use Pension Tax Relief To Offset Capital Gains Tax

Published / Last Updated on 13/02/2021

Pension Payments to Offset Capital Gains Tax

We are seeing much speculation about the Chancellor’s March 2021 Budget.  Many are expecting changes to Capital Gains Tax with a move to income tax rates of 20%, 40% and 45% rather than separate capital gains tax rates of 10% for basic rate taxpayers and 20% for higher rate tax payers for non-investment property gains.  The rates for selling investment property gains being 18% for basic rate tax payers and 28% for higher and additional rate tax payers.

This could mean a move to higher capital gains tax rates for all.

So if capital gains tax gets worse, the only way to reduce your ‘income’ to perhaps keep below or get back below the higher rate tax threshold is pension contributions.  By investing your capital gain into pensions you may suffer capital gains now at 10% to 28% or if there are changed 20% to 45% BUT if you then reinvest your gain back into a pension you will get tax relief on your pension of 20%, 40% and 45%.

That said, if you are a non-earner and only eligible to pay in £3,600pa gross into a pension fund then there may not be enough tax relief to offset fully against any CGT bill.

  • Pay pension contributions to reduce earnings bands to move into a lower band for capital gains tax.
  • Tax relief on pension contributions from proceeds off capital gains to offset any capital gains tax payable.

This simple tax planning technique is something to keep in mind not just today but also if there are changes to capital gains tax.  Once funds are inside your pension, they currently can then grow capital gains tax free.

Either way, whether Sunak increases capital gains tax rates or not, pension payments and tax relief are still an excellent way to offset tax paid against tax relief.

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