The end of the current tax year is looming meaning you only have a limited time left to make arrangements to pay into your pension for 2016/17.
Whether you are an employee, an employer or a company director, there are some compelling reasons to look at making additional pension contributions this side of the tax year.
Here is the first in a two-part series of articles looking at the reasons to act now.
Recover personal allowances
Personal pension contributions can significantly reduce income tax liability. There are a number of ways in which tax relief can be received but most commonly, basic rate tax at 20% is automatically claimed from HMRC by your personal pension provider and added to your pot.
If you’re a higher or additional rate taxpayer, you can claim further tax relief from HMRC. This is usually claimed through your self-assessment tax return, although HMRC may also adjust your tax code to give you this additional relief.
The highest effective rate of tax relief available is for those with a taxable income of between £100,000 and £122,000. A personal pension contribution that reduces income to £100,000 would elicit an effective rate of tax relief at 60%. For most higher income earners, the effective rate will be somewhere between 40% and 60% – still representing a significant tax break.
Tax relief at highest rates
For the time being the rate of tax relief on pensions savings (as described above) remains relatively generous. It is unclear how long this will be the case, especially as pension savings have regularly come under the spotlight of the Budget in recent years. In short, the higher rates attracted by personal pension contributions may not be around forever – so act now whilst you have the opportunity to maximise on these.
Avoid annual allowance tapering
If you are a higher earner (over £150,000) you may be aware that the annual amount you are able to pay into your pension tax free may now be liable to tapering. Every £2 of ‘adjusted income’ received over and above £150,000 results in a £1 reduction in your annual pension allowance, until their allowance drops to £10,000. If you have unused pension allowances from the previous 3 years, you may be able to carry these forward to reduce or remove the impact of allowance tapering.
Last chance for £50k contribution
As mentioned above, pension rules allow you to carry forward previous years’ pension annual allowances, to a maximum of 3 years (currently back to 2013/14). In 2013/14, the annual allowance was £50,000, £10,000 higher than the current allowance. 5 April 2017 is therefore the last opportunity you have to access this higher allowance available.
Avoid the child benefit tax charge
Child benefit, which can be worth around £1,800 per year for a family with two children, becomes taxable if one of the earners in a household receives over £50,000 in ‘taxable income’ and the benefit is cancelled out altogether over and above £60,000. Making a personal pension contribution can reduce your ‘income’ for calculation purposes so it may be worthwhile investigating.
If any of the above reasons resonate with you and you would like to discuss your options further, please contact us to speak to one of our advisers.
For further reasons to contribute / make additional contributions to your pension before the end of the current tax year, look out for our next article.