Pension contributions – don’t get caught out!

Wednesday, September 26th, 2018

Here at Copia Wealth & Tax Limited of Wolverhampton, we are not just “run of the mill” accountants. In fact, we aim to deliver holistic business advice which includes detailed wealth planning and wealth management.

This month we focus on a few of the tax implications that surround the timing and quantum of pension contributions.

Check out your pension savings annual allowance

HM Revenue and Customs (HMRC) has updated its guidance regarding the carrying forward of any unused pension savings annual allowance.

For most, the maximum amount of pension savings that qualify for relief each tax year is £40,000, but by utilising any unused relief brought forward from the previous 3 tax years (on the basis that the individual was a member of a pension scheme that year) this amount can be increased.

It is essential that the brought forward relief from the earliest year is utilised before later years. By way of example, for the current tax year 2018/19, any unused relief from 2015/16 must be utilised first, (in addition to the current year relief), then 2016/17 and lastly 2017/18.

Note that the 2015/16 pension annual allowance lapses on 5 April 2019

To fully utilise any 2015/16 unused relief, any additional pension savings would need to be paid to the pension fund by 5 April 2019, otherwise the relief for that year will be lost.

Be aware that for some taxpayers, the method of calculating unused relief for 2015/16 is extremely complicated as the government changed the pension rules part way through the year on 8 July 2015. The amount of pension allowance will depend on the pension input period of your scheme, but we can help you in calculating the available 2015/16 relief if you have not already had full relief already.

Pension tax relief is tapered for those with higher incomes

For most taxpayers, the maximum pension input annual allowance is currently £40,000.
However, from 2016/17, taxpayers with ‘adjusted income’ of over £150,000, or ‘threshold income’ of over £110,000, receive a tapered (or reduced) annual allowance.  By way of example, in the case of those taxpayers having adjusted income more than £150,000, their annual allowance reduces by £1 for every £2 of excess income until the recalculated allowance hits £10,000 and that becomes the maximum amount that can be claimed.

The calculations of ‘adjusted income’ and ‘threshold income’ are complicated and we can help you calculate it where this restriction may apply. There are also ways in which these figures can be reduced to minimise this restriction’s impact.

You could be taxed if your pension savings are too high!

A pension provider should send a statement informing you if you have exceeded your annual allowance. Should you have more than one pension scheme, make sure to get statements from each provider to help you work out how much you have really exceeded the allowance.

This is very important because if your total pension contributions exceed your annual allowance in any tax year, (and you do not have unused annual allowances from the 3 previous tax years to bring forward), you’ll have to pay tax on any excess!

Of course, we can help you check whether you need to pay anything further. Just call us!

You will also need to be wary of the Lifetime Allowance rules that mean a pension pot more than £1.03 million could become subject to additional tax charges.

Copia Wealth & Tax Limited; Accountants that are always here to help!

As can be seen from the above, despite the supposed “simplification” of pensions by the Government in 2015, the rules remain extremely complicated and we are expecting further reforms in future Budgets, but for now, saving in a pension remains very tax-efficient; e.g. for higher rate taxpayers, the net cost of saving say £10,000 in a pension is currently £6,000.

Here at Copia Wealth & Tax Limited, Wolverhampton, we are here to help you maximise your tax position. Call us now on 01902 783172 to explore how one of our friendly experts may be able to help you do this by maximising pensions contributions and by implementing other tax efficient strategies or alternatively just click HERE to email us via our website.

We look forward to hearing from you!