April 12, 2021

Article

As I have mentioned in articles before, contributing to a pension can be a great way to help build wealth, particularly due to the tax relief that is available to increase the contribution.

For most people, the amount that they can contribute to a pension fund each year will be dictated by what they can afford, whether as a percentage of their earnings, or based upon any cash savings that they may wish to contribute to a pension fund.

For some, it will be restricted to the pension annual allowance of £40,000 (gross). Ordinarily, this is the maximum that can be contributed to a pension fund in one tax year on which tax relief can be obtained. Any contributions in excess of this amount could potentially result in a tax liability.

Furthermore, as soon as your income, inclusive of employer contributions exceeds £240,000 (£150,000 before 6 April 2020), your pension annual allowance starts to get reduced by £1 for every £2 of income above it. This is known as the tapering of the annual allowance and the taper is restricted to £36,000 (£30,000 previously).

Therefore, by the time your income, including employer contributions hits £312,000 (£210,000 previously) or more, your pension annual allowance is restricted to just £4,000 (£10,000 previously) that you can contribute to a pension each year and receive tax relief. This includes employer contributions. If you exceed this, you may have to pay a tax charge.

Any unused pension annual allowances from the previous 3 tax years can be used, as long as a pension scheme was in place. If you have income of above £312,000 in one year due to a one off bonus payment and your tapered annual allowance was just £4,000 then it might be possible to make use of any of the unused £40,000 allowances from the previous 3 tax years (assuming income and employer contributions was less than £240,000 and £150,000 thresholds in each of those earlier years). In this case, a maximum of £124,000 (gross) could be contributed to a pension fund if there had been no contributions in the earlier year and there was a pension fund in place.

This kind of planning could save tax of 45% (£55,800) based on this example, despite having income of £312,000.

If you or any of your family, friends and colleagues have income above £100,000, or any unused pension annual allowances, please give me a call to see whether you or they could benefit from some significant tax savings as a result of this kind of planning.

Great care needs to be taken if you are in some kind of defined benefit pension scheme where you are guaranteed a pension in retirement based upon your career earnings. Please get in touch with our Financial Planning Team if this is the case.

let's
 talk...

Fill in the form and we’ll get straight back to you.

tick
excellence
tick
creativity
tick
service
tick
trust
Newsletter sign up

Sign up & stay informed

Get started today

Fill in the form below to we'll get straight back to you.