Is anything wrong with this simple Income Tax saving scenario? Please let me have your feedback.

Husband and wife, small corporate business owners aged 55+, have for years paid themselves small salaries and the balance of profits as dividends, (each managing to stay under the higher rate tax band). They have some pensions already built up (but nowhere near the lifetime allowance), but will not be retiring for some time.

They now decide to open an income drawdown pension arrangement using their existing pensions and new company contributions. They opt for capped drawdown, which they may still do until April 6th 2015) and in doing so crystallise some of their pensions before the end of 2014-15, which action preserves their annual pension contributions allowance at £40,000 per year. Let us also suppose the GAD limit they achieve plus tax free cash is more or less sufficient for their income needs.

Going forward they re-structure their remuneration, leaving the small salaries at the same level, and beginning to pay company pension contributions into the accumulation part of their drawdown plan - effectively in place of the dividends they previously paid themselves.

The pension contributions are chargeable against corporation tax. The clients proceed to make ongoing contributions and withdrawals through the pension drawdown accounts, paying income tax at 20% on 75% of the sums withdrawn, (25% being tax - free as usual). So, the effective rate of tax on a large proportion of their income is now 15% instead of 20%.

There are other scenarios which will also achieve a tidy tax saving, e.g. higher rate taxpayers, and salaried individuals.

I cannot see that any tax-free cash is being recycled, nor any other fundamental flaw in this scenario. But tax is not my strength. I would appreciate comments - e.g. have I missed something, or otherwise would HMRC have an issue with this?
  • Look at new s227G(3).  I'm no pensions tax specialist, but I think it says that if you go into drawdown before 6 April 2015, you go into the new rules and have a deemed flexi-access start date of 6 April 2015.  Your future AA is £10,000.  If you think otherwise, feel free to debate it here so that others can add their views.
  • I think the key thing is whether you enter capped or flexible drawdown before April 6 2015.
    At the moment, a person who has already taken flexible drawdown (prior to 6/4/2015) has a zero annual allowance, but will begin to qualify for a new reduced AA of £10,000 just like anyone else who designates a drawdown fund after April 5, 2015. That to me is what S227G(3) seems to be saying. I'm going by the explanatory comments at

    But provided you enter capped drawdown before 6/4/2015, and continue to only draw within the capped drawdown limits, I think you will maintain the current AA of £40,000. I can't see anything that says otherwise.

    A new capped drawdown plan cannot be created after 5/4/2015 - all new plans or existing plans used for drawdown fro the first time will be flexible drawdown plans.

    But if you or anyone else can quote me anything to the contrary I'll be grateful.