Tax Year End is Approaching.
Pension Contributions are an important consideration as tax year end approaches, serving as a backstop for many tax allowances. There are various factors from a tax perspective that individuals should consider when planning around the end of the tax year. Consequently, some aspects of pensions can be overlooked.
While pensions have certain limitations and restrictions as a savings vehicle, they have become more flexible over time and still offer numerous valuable tax advantages. Therefore, it is essential to ensure you are maximising these benefits so that your money works as effectively as possible for you. To that end there are a few things you should think about throughout the year and as the 5th of April approaches.
Employee Contributions
Your personal contributions as an employee into your workplace pension play a crucial role in managing your tax liabilities. Paying into your pension personally increases your basic rate tax band by the equivalent amount, which means that personal pension payments can help reduce your income tax liability. Pension contributions receive basic rate tax relief at source, effectively adding 20% to any contribution you make. Higher rate taxpayers can claim additional relief through their self-assessment tax return.
High Rate Tax Payer
If you are a higher rate taxpayer making personal contributions and do not complete a self-assessment tax return, it is advisable to consider doing so to ensure you receive the full benefits of these payments. For individuals who find themselves marginally over the higher rate tax band or earning over £100,000 per year, pension contributions can provide valuable benefits by helping to lower their taxable income for that year.
The most significant impact occurs for those exceeding the £100,000 annual income threshold since this is where individuals begin losing their personal allowance. The personal allowance is approximately £11,000 per annum and applies to everyone at the start of their earnings in a given tax year. Once an individual exceeds £100,000 up to £120,000 in income, their personal allowance decreases by £1 for every £2 earned above this threshold.
It is important to note that the marginal tax rate for incomes between £100,000 and £120,000 effectively reaches around 60%, which is considerably higher than even the additional rate of 45%. Therefore, making small or medium-sized pension contributions to bring effective taxable income back below £100,000 when possible can be extremely beneficial and may lead to significant long-term savings on taxes.
Employer Contributions
Employer Contributions can also play a significant role in pension planning. For business owners, making contributions into a pension plan for themselves or their employees can be an excellent strategy to reduce corporation tax on the business while transferring assets from a taxable environment to a more favourable personal holding.
Contributions made will lower your corporation tax by an equivalent amount if they meet HMRC’s wholly and exclusively test. This means that payments must be appropriate relative to what the individual contributes through their work, and reflect an overall remuneration package that is fair and justifiable.
This strategy becomes particularly interesting if you are nearing retirement age since payments into your pension can be accessed at any time; notably, 25% of those funds could also be withdrawn as tax-free cash
One-Off Large Contributions
The maximum you can pay into a pension in a given tax year is £60,000 or 100% of your taxable income, whichever is higher. However, you can also carry forward up to three years of any unused allowances. This means that if you haven’t been maximising payments, you can go back three additional tax years if you’re looking to make a one-off large contribution. The carry forward rules allow the ability to catch up on years you haven’t maximised but bear in mind that you can only go back three years. Therefore, it’s important to utilise the allowances as best as possible when available.
The cap on contributions to 100% of salary does not apply with employer pension contributions. These are covered by the wholly and exclusively test; however, it means that those on a lower salary may be able to contribute more than their salary up to the hard cap of the £60,000 per annum allowance. Again, these contribution levels must be justifiable.
Annual Allowance and Tapered Annual Allowance
As stated earlier, the maximum you can pay into a pension in a given tax year is £60,000 or 100% of your taxable income, whichever is higher. However, Aother often misunderstood limit regarding pension contributions is the tapered annual allowance.
For those with an income above approximately £200,000 per annum, the amount you can pay into your pension each year reduces gradually from £60,000 down to £10,000. It’s essential to check what your individual maximum contribution basis is since income isn’t always just salary; it includes bonuses and other taxable income like rental profits or interest. As a result, many people may inadvertently fall foul of a reduced £60,000 contribution limit without realising it.
Payments made over this allowance will incur penalty tax charges therefore, if in doubt about your contributions being within allowances or limits set by recent legislation changes affecting pensions — such as removing any lifetime cap on how much money one could save in a pension — it’s advisable to seek professional advice.
Article by Adam Nettleship
CEO, Chartered Financial Planner
The options mentioned in this article are not an indication of personal recommendations or financial advice. No actions should be taken as a result of the information in this article.
Expert Advice on Your Pension
Pension contributions, tax payments and retirement planning are specific to each individual. Bespoke advice designed specifically for you can help make a difference both now and in the future.
For a thorough review of your circumstance and advice unique to you, speak with a member of the Bigmore Financial Planning team today.
|
|
