What is the 5% Allowance?
One of the main features of using an offshore plan is the ability to take withdrawals of up to 5% of the premium paid each plan year without triggering an immediate tax charge. This is known as the 5% allowance.
Section navigation
Where some or all of the 5% allowance has not been withdrawn from the plan in one year, it will rollover into the next plan year.
For example:
Single payment plans:
If the Initial payment into the plan was £200,000. The 5% allowance per plan year would be £10,000 (£200,000 * 5%).
If 3% (£6,000) was withdrawn in plan year 1, 7% (£14,000) could be withdrawn in year 2 without an immediate tax liability (2% (£4,000) carried over from plan year 1, plus the 5% allowance (£10,000) from plan year 2).
Regular payment plans:
In order to carry out a calculation where your client has a regular premium plan, the 5% allowance is calculated according to the total payments paid as at the end of that plan year.
Plan year 1:
Monthly payment of £500 * 12 months = £6,000: 5% allowance = £300 (£6,000 * 5%)
Plan year 2:
Monthly payment of £500 * 12 months = £6,000: 5% allowance = £600 (£300 + £300)
Plan year 3:
Monthly payment of £750 * 12 months = £9,000: 5% allowance = £1,050 (£450 + £300 + £300)