Category Archives: Pensions

A Reminder of the Personal Allowance Trap

The tax rate applied to the first £12,500 of income earnt in a tax year is 0%. This is what is known as the personal allowance, however not everyone benefits from it because it is reduced by £1 for every £2 of taxable income earnt in excess of £100,000. This means that if you have taxable earnings in excess of £125,000 your personal allowance is removed completely.

Personal pension contributions act to extend the basic rate tax band and therefore allows those able to make a gross contribution equal to the amount of income earnt in excess of £100,000, to regain the allowance in full. An example of how pension contributions can help clients in this situation is as follows:

  • Client A has employed income of £95,000, taxable benefits of £2,500 and received a bonus of £30,000. There taxable earnings are therefore £127,500.


  • If no pension contributions are made, then their income tax liabilities would be £43,500 and total take home pay would be £75,140 after accounting for NI contributions.


  • If a gross contribution of £27,500 were made Client A would need to transfer £22,000 of their savings to a pension. Basic rate tax relief is given at source which means the investment is uplifted to £27,500. Client A would claim higher rate relief via self-assessment totalling £5,500 (20%) would regain 100% of their personal allowance, creating an additional saving of £5,000.


  • The net cost of the contribution above is £11,500. Without accounting for investment growth, this contribution amounts to a minimum of £27,500 sat in a pension for future benefit. The effective rate of relief is in excess of 58%.


This is a clear example of how allowances can be utilised effectively when knowledge is applied. For more information on this, tax year end planning or financial planning more generally, please contact us.

Note – the figures in this article relate to the 2020/21 tax year.

The personal allowance is increasing to £12,570  for 2021/22.


The Financial Conduct Authority does not regulate tax advice.

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Unclaimed Higher and Additional Rate Tax Relief on Pension Contributions

Many employed people misunderstand how pension contributions into their workplace pension scheme are made on their behalf. This can often mean that higher and additional rate tax relief goes unclaimed.

A common misconception is that higher and additional rate tax relief is given automatically on all pension contributions.

This is only the case if contributions are made on a net pay basis where the employer deducts pension contributions from pay prior to it being taxed via PAYE (common across many occupational pension schemes). Tax relief is also automatically given on pension contributions that are made via salary sacrifice; which is an arrangement whereby an employee contractually agrees to reduce their salary in return for an employer funded pension contribution.

Often employers will offer employees various funding options which act to increase contributions to a workplace scheme if an employee is prepared to pay more into their pension (given as a percentage of their basic salary). These incentives to save should not be mistaken for salary sacrifice arrangements – and therefore the contributions need to be treated differently for tax relief purposes.

The most common types of employer funded pensions are still stakeholder and group personal pensions which are often set up to receive employee contributions on a relief at source basis. In this case, employees’ pension contributions are made from pay that has already been taxed. The scheme administrator then applies to HMRC for the basic rate tax relief and adds this to the individual’s pension fund. Higher or additional rate tax relief needs to be claimed by you as an employee via self-assessment or by contacting the local Inspector of Taxes when the contribution is made.

The need to act in order to claim higher and additional rate tax relief is often overlooked and means thousands of pounds of tax relief can go unclaimed each year.


Client A earns £75,000 per annum gross and contributes £300 per month into their pension from their net pay. They have been doing this for the last five years. Their annual gross pension contribution is £4,500 per annum which means that they are entitled £900 of higher rate tax relief but they have failed to claim this from HMRC.

If a backdated claim is made in the 2020/2021 tax year Client A would receive a tax rebate totalling £3,600 for unclaimed relief in tax years 2016/2017,2017/2018, 2018/2019 and 2019/2020.

In this example the figures are actually relatively modest. We have previously worked with clients where relief on gross pension contributions in excess of £20,000 per annum have gone unclaimed for a number of years. In these situations, a backdated claim can provide a welcome injection of cash (particularly if done in the month of January!)

Actions to Take

There is a time limit of four years to claim back any tax relief from HMRC. A claim must be made within four years of the end of the tax year that an employee is claiming for.

For example, we are currently in the 2020/2021 tax year which ends on the 5th April 2021. This means that you could claim back as far as the 2016/2017 tax year which ended 5th April 2017.

To make a claim, you can call or write to HMRC and confirm what your gross employee pension contributions were during a tax year. You will need evidence of that claim – this can be requested from your respective pension providers, which is something a financial adviser can assist with.

Relief could be given in three ways: a tax rebate, an adjustment to your tax code or reduction in the tax that you already owe HMRC.

Reinvesting for Greater Reliefs…

Provided allowances permit, reinvesting any reclaimed relief back into your pension would be a prudent and worthwhile exercise. In the example above, if Client A reinvested £3600 back into their pension, they would receive basic rate tax relief of £900 at source taking their gross pension contribution to £4,500 and providing additional higher rate tax relief of £900.  This would take the total value of the backdated claim to in excess of £5000 – an amount that more than warrants the investment of time!

For more information on the process, or to speak to us in relation a specific client’s circumstances, please get in touch.


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The Tapered Annual Allowance – Can You Escape It?

The Spring Budget 2020 increased the annual allowance income limits, taking many high earners out of the tapered annual allowance.

The new limits explained

Every individual is usually eligible for the standard annual allowance for pension contributions of £40,000 per annum. However, the tapered annual allowance reduces the standard annual allowance when income reaches certain levels. These income limits have recently been increased.

The ‘adjusted income’ limit has risen to £240,000 (up from £150,000), and the ‘threshold income’ limit to £200,000 (previously £110,000).

Tapering reduces the standard £40,000 annual allowance (AA) by £1 for every £2 of adjusted income over £240,000. The minimum annual allowance is £4,000 for anyone with adjusted income of £312,000 or more.

This means many of those previously subject to the full taper will see their annual funding allowance increase by £30,000 per annum. An extra £30,000 of gross funding equates to annual tax relief of £12,000 for a higher rate tax payer, £13,500 for an additional rate tax payer and £5,700 for a company director claiming corporation tax relief.

It’s clear that for some this is really good news, but unfortunately very high earners could see their funding ability cut further. Those with threshold income over £200,000 and adjusted income over £312,000 will get less tax relief, as the maximum annual allowance now drops to £4,000 (previously £10,000).

What is adjusted and threshold income?

It’s important to understand what counts as adjusted income and threshold income. Pension funding is treated differently under the two definitions and this is important in effective planning.

  • Adjusted income is broadly total income plus any employer pension funding. This is relatively easy to identify for money purchase schemes but less so for defined benefits.
  • Threshold income any individual pension contributions are deducted to calculate threshold income.

This means that an individual pension contribution can help avoid the taper.

What else should you factor in?

Redundancy payments. While the first £30,000 is tax free and does not count towards either of the adjusted or threshold income limits, anything above this will count. This may mean an individual not normally subject to the tapering rules is now caught. Good planning can help to navigate these rules.

  • Making an individual pension contribution so that threshold income dips below £200,000 might restore the full £40,000 annual allowance and allow more tax relief on at least part of the taxable redundancy payment. This may be particularly attractive to those near to, or above, the minimum pension age of 55.
  • Care must be taken when accepting an offer of redundancy ‘sacrifice’ whereby the package includes a payment by an employer into the pension scheme. This may be enhanced if the employer offers to pay in their employer National Insurance savings (from 6 April 2020 employers now pay NI on the taxable part of a redundancy payment). However, care should be taken as this will be a new sacrifice arrangement and will count towards both adjusted income and threshold income. In such circumstances, taking the redundancy payment and making an individual contribution may be the better option if it keeps threshold income below £200,000, and retains the full annual allowance.

Carry forward. In order to make a contribution large enough to take threshold income below £200,000, you may need to rely on carrying forward unused annual allowances from the previous three years. When determining how much might be available, remember that the annual allowance in those years might also have been tapered. So even if no contributions were made at all in those earlier years, the amount for carry forward from each year may still be less than £40,000.

Non-deductible relief. Although income tax relief may be available on certain transactions, it may not reduce adjusted or threshold income. These include:

  • Investing in VCT, EIS, and SEIS– income tax relief is given as a ‘tax reducer’ and is based on a percentage of the amount invested. It reduces the final tax bill, but does not reduce taxable income. Adjusted and threshold income are both based on taxable income and are therefore unaffected by such investments.
  • Gifts to charity– Gifts made under gift aid will not reduce adjusted or threshold income.
  • Investment bond gains– The full chargeable gain will be added to adjusted and threshold income – not the average gain used for top slicing relief. This could counter any planning to retain the full annual allowance for this tax year.



Although the increase in the adjusted income and threshold income limits could be read as a pension tax give-away for high earners, the measure was introduced primarily to solve an issue around annual allowance tax charges that existed amongst NHS doctors.

For those who normally have a reduced annual allowance, this may be a window to boost your pension savings with maximum tax relief.

Some suggest the widow of opportunity to do so may be short lived. Speculation surrounding the reform of pension tax relief continues, perhaps unsurprising given current levels of Government debt. It is possible that the rate of relief available becomes less attractive in the future.

For more information on any of the above information or discuss the best way to navigate pension funding for your own personal circumstances, please contact us.

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Three Reasons to Review the Contents of your Company Pension

The latest statistics into auto-enrolment have shown that pension saving is on the up, with figures from 2019 showing that over 10 million individuals are now enrolled in a workplace pension. However, not all pensions are equal and a series of other statistics suggest that individuals could be missing out on maximising their potential investment returns.

It is estimated that around 90-95 per cent of individuals registered with an employer pension scheme stick with the default fund, leaving significant room to question whether an alternative choice might be better suited to their needs.

Research by Hargreaves Lansdown found that 74 per cent of people are unaware of where their pension is invested, with only 11 per cent of those surveyed knowing what was meant by a ‘default fund’.

Clearly, people are opting for the easiest option when it comes to setting up their pension, and thereafter failing to take a significant interest in how their pension is growing or performing. However, the default funds within an auto-enrolment pension are unlikely to fit the age, attitude to risk or personal preferences of every individual.

Here are three reasons you might want to review the funds your pension is invested in.

Look to improve performance

A company pension fund will usually have to meet the needs of a large number of employees, across a wide variety of earnings and ages. As a result of having to provide a one-size-fits-all solution, the majority of default pension funds offered by auto-enrolment are likely to be conservatively managed. For most people, better investment options may be available, resulting in the potential for increased returns.

Research by Hargreaves Lansdown shows that default pension options underperformed the most popular funds actively selected by workers – or their advisers – by 4.89 per cent a year, over a five-year period.

Although you may not consider that a 1% or 2% increase in the performance of a fund would make a great deal of difference, underperformance at this level over the course of an individual’s working life could mount up into a significant amount.

Check that your investments align with your beliefs

As more and more people look to take a more sustainable or ethical approach to their lives, the credentials of the companies in which their money is invested is becoming a greater concern for pension holders.

Within any investment fund will be a number of companies – and these can vary across a wide range of industries and individual companies – whose practices you may not necessarily agree with. The process of investing money effectively means you are supporting that business, a fact that you may feel uncomfortable with.

It is highly unlikely that the default funds the majority of company pension schemes are invested into would be classed as ‘ethical’. Therefore, taking a closer look at the default funds and the companies within them may prompt you to make changes, opting to invest in funds and companies that align more closely with your ethical stance.


Spark your interest in long-term planning

Many people pay into a pension for many years without ever really thinking about what it means. The money that you accumulate in a pension effectively becomes your income stream when you reach retirement age, so it’s in your interests to understand it. Once people start to look into their pensions in more detail, it can spark several questions – not least the question of whether you’re saving enough for a comfortable retirement. Many people will contribute the minimum level required, but could perhaps afford to contribute more. Some employers will offer to match additional contributions made by employees – so this could be well worth it in the long term.

Outside of this, some people may wish to take greater control over their own pension, or look at the other tools available to them. If you wish to develop a more robust financial plan and look at all of your options, including ISAs, private pensions, investments and other forms of savings, a review with a financial planner can prove a worthwhile exercise.

If you’re unsure what funds your pension is invested in, the first step is to speak to your employer or get in touch directly with the pension provider. From here, you should be able to check what you’re invested in, thereafter working out if these investments are right for you.

The value of investments and income derived from them can fall as well as rise. You may not get back what you invest.


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New Report Highlights Retirement Styles and Their Cost

A new report has revealed the amount of money individuals and couples will need in order to access different styles of retirement. The Retirement Living Standards report, produced by the Pensions and Lifetime Saving Association (PLSA), has been developed to help individuals paint a better picture of the kind of lifestyle they could have in retirement according to the income they stand to receive.

The publication shows three different levels of retirement – minimum, moderate and comfortable, demonstrating each with a basket of goods and services, ranging from everyday essentials including food and drink to other purchases that may be made on an annual basis, such as holidays.

A ‘minimum’ retirement of income of £10,200 per year for a single person (or £15,700 for a couple), would afford a one week holiday plus a weekend break in the UK every year, eating out about once a month and a £38 weekly food shop. A moderate income of £20,200 a year for a single person (or £29,100 for a couple) provides ‘more financial security and more flexibility’, affording a 2 week holiday in Europe and a long weekend in the UK every year, a £46 weekly food shop and £750 for clothing and footwear each year. In order to experience a ‘comfortable’ retirement with more financial freedom and some luxuries, including regular beauty treatments, two foreign holidays a year and a £56 weekly food shop, an annual income of £33,000 a year (or £47,500 per couple) would be needed.

The full breakdown of the expenses that could be afforded at each level of retirement can be explored in detail here

The Retirement Living Standards have been developed following previous PLSA research which showed that 51% of people focus on their current needs and wants at the expense of providing for the future and only 23% of people are confident they know how much they need to save.

The report highlights that with the current state pension entitlement and an auto-enrolment pension pot at the minimum contribution level, ‘most people’ in the UK could attain the ‘minimum standard’ of retirement living. When looking at the detail of what this entails compared to what a larger annual income could afford goes some way to help people picture their future retirement.

These findings are a useful way for individuals and couples to benchmark their retirement aims and goals. Although many people save for retirement, they rarely have a clear picture of how much they will need, particularly during the early years of pension contributions. Although the Retirement Living Standards are a useful starting point, in order to find out if you’re on track for the type of retirement you want, it will be necessary to do some further research or consult a financial adviser.

We tend to find that as they get closer to retiring, clients develop a sharper focus on what they want from retirement. Unfortunately, by leaving it until the latter stages of working life, individuals may find that they haven’t left enough time to accumulate savings.

It can be said with some certainty that the earlier saving for retirement commences, the ‘cheaper’ it is – due to the ability for compound interest – reinvesting the proceeds of investments and savings.

For more information on retirement planning, please contact us to speak to one of our Chartered Financial Advisers.

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