Tax year end – don’t forget about your pension

As we move towards the end of the tax year the focus for many people will be on capital gains tax or ensuring their £20,000 ISA allowance is fully utilised.

But what about pensions? The potential for an even higher contribution than is available through the ISA regime is surely something worth considering.

With the added benefit of utilising the ‘carry forward’ rule by taking advantage of any unused allowance from the previous three tax years, a pension should take pride of place in any long-term financial planning.

What are the numbers?

For most UK taxpayers, a pension contribution will benefit by way of tax relief from the government – for every £100 paid into a pension, HMRC adds a further £25. Tax relief is based on an individual’s marginal rate of tax and as such higher and additional rate taxpayers may claim further relief through self-assessment.

Tax relief on personal contributions is limited to 100% of relevant UK earnings or £3,600, whichever is higher, subject to a maximum of £40,000 known as the annual allowance. It is important to note that ‘relevant UK earnings’ does not include dividends, together with rental, investment or pension income.

Is it possible to contribute more than the £40,000 annual allowance?

The simple answer is yes, depending on an individual’s circumstances, it may be possible to pay more than £40,000 into a pension by utilising unused annual allowance from the previous three tax years. This is known as carry forward relief and is available providing the individual has been a member of any registered pension scheme in the tax years being used for this purpose.

Remember that tax relief on personal contributions is limited to the relevant UK earnings in the tax year the contribution is paid, not the tax year from carrying forward.

What about ‘high income’ individuals?

High income individuals are defined as those with an ‘adjusted income’ of over £240,000 and ‘threshold income’ of over £200,000.

For these higher earners the annual allowance is tapered, reducing the annual allowance by £1 for every £2 of adjusted income above £240,000. The maximum reduction will be £36,000 with an annual allowance of £4,000 for anyone with income of £312,000 or above.

Tapering does not prevent an individual taking advantage of carry forward and is applied in the same way as the standard annual allowance.

Are pensions here to stay?

Pensions have a long history in the UK and will continue to form the basis for long term retirement planning. The additional tax benefits they enjoy suggest this will still be the case moving forward, however, the rules have continued to change and evolve since ‘pension simplification’ in 2006 with sound professional advice now more important than ever.

The tax year-end deadline is fast approaching so if you feel that you or any of your clients would benefit from further discussions on this, please contact us below.

Important note: investments can fall as well as rise, and past performance may not be a reliable guide to the future

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