pension investment cheklist

We have now entered British Summer Time and the thoughts of dealing with last minute tax affairs as we approached the end of the last tax year now start to seem a distant memory. However, it is never too early to start thinking about tax planning for the year ahead and a pension investment check list can really help.

 

Revisiting your pension affairs is a great way to assess where you are and a pension invest check list enables you to be thorough. It provides us with a number of key opportunities to make the most of the tax reliefs and allowances which are available. What follows are a number of salient points we should all consider.

 

  • The first thing to think about in your pension investment check list is when making personal contributions your payments will attract tax relief at your marginal rate of income tax on gross contributions up to 100% of your earnings (or £3,600 if more). Even non-taxpayers receive basic rate tax relief if the contributions are made to a plan operating ‘relief at source’ such as a personal pension plan.

 

  • Pension contributions are subject to an annual allowance of £40,000. This is the maximum that collectively you and your employer can contribute per tax year without you having to pay tax on any of the contributions.

 

  • Personal tax relievable contributions are restricted to your relevant UK earnings which are earnings from an employment or trade only (dividends, rental income and interest do not count). This could be less than the annual allowance.

 

  • If you have sufficient earnings, or if your employer is making the contribution, you and your employer can use unused annual allowances from up to the previous 3 tax years, provided you had a UK registered pension in those years. This is known as carry forward.

 

  • If you don’t have any UK relevant earnings but are less than 75 years old and UK tax resident then you can still contribute up to a maximum of £3,600 gross per annum receiving tax relief at the basic rate (20%). The good news here is that you can also pay into someone else’s pension including your partner even if they don’t have earnings or a child or grandchild on the same basis.

 

What is the position if you are a high earner?

 

  • From April 2016 the Government introduced what is known as the Tapered Annual Allowance. This meant that for tax years 2016/17 to 2019/20 the standard Annual Allowance of £40,000 reduced by £1 for every £2 of your ‘adjusted’ income over £150,000 (adjusted income is taxable income from all sources plus employer pension contributions). Once adjusted income reached £210,000 or more, the annual allowance was reduced to a minimum of £10,000.

 

  • It should be remembered that the tapering of the annual allowance didn’t apply in those tax if total income from all sources less your own pension contributions was £110,000 or less. This is known as the ‘threshold income’ amount.

 

  • However, following the last Budget, the Chancellor announced that the Tapered Annual Allowance limits were increasing for the 2020/21 year. The Threshold and Adjusted Income limits have moved from £110,000 and £150,000 respectively to £200,000 and £240,000.

 

  • These changes have removed many people from being affected by the Tapered Annual Allowance. For some very high earners the position has worsened as the minimum annual allowance after tapering is now £4,000 (instead of £10,000). This affects those with adjusted income over £300,000. Once adjusted income reaches £312,000 or more, the minimum Annual Allowance of £4,000 applies.

 

  • If you have sufficient annual allowance (including carry forward), you may be able to make a pension contribution to reduce your income to £100,000 which will restore your tax free personal allowance in full (or any contribution that reduces your income to below £125,000 will reinstate some personal allowance).

 

 

  • If you benefit from bonuses, there may be an opportunity to exchange a bonus for an employer pension contribution. This results in both employer and employee national insurance savings whilst also offering the employee income tax savings and the employer, a corporation tax saving.

 

For business owners there are opportunities in respect of pension contributions and the treatment of profits.

 

  • For many directors, taking profits as a pension contribution can often be an efficient way of both drawing remuneration and reducing both their and the company’s overall tax bill.

 

  • Additionally, there is no employer or employee national insurance payable on pension contributions.

 

If you are approaching retirement there are opportunities to boost your pension pot.

 

  • It is important to think about making pension contributions before you access your pension benefits. If you are looking to take advantage of the new rules surrounding pension income drawdown flexibility for the first time, you need to avoid triggering the Money Purchase Annual Allowance. Once triggered, this will reduce the opportunity to fund a defined contribution pension tax efficiently to just £4,000 annually with no ability to carry forward.

 

Although going through the above pension investment check list is useful to get started, it is important to ensure that you take financial advice so that any planning undertaken is right for you and that you understand the full implications in respect of your overall tax position, wider financial planning arrangements and state benefits.

 

Paul Holt is a Chartered Financial Planner.

 

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