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Pensions: Tax Year End series 2018/2019 – Tax Planning Opportunities.

Pensions are a tax efficient way to save for retirement and tax breaks are given on contributions you make. These are normally at the highest rate of income tax that you pay.

by
Rachael Cornwell + Stuart Walton

21.02.2019

Tax year End series.  No 1: Pensions.

By Rachael Cornwell & Stuart Walton of Charles Stanley Financial Planning.

One of the most common questions asked at this time of year surrounds end of year tax planning, in the first article on this subject, Rachael Cornwell and Stuart Walton take a look at Pensions.

Tax Relief for Pension Contributions

Pensions are a tax efficient way to save for retirement and tax breaks are given on contributions you make. These are normally at the highest rate of income tax that you pay. An individual is limited to “tax-relievable” contributions of, the greater of £3,600 gross per annum, or 100% of relevant UK earnings in the tax year they pay the contribution. Employers can also contribute to a member’s pension.

Top Tips to maximise pension tax relief:

  • Claim higher rate tax relief in your tax return: If you make a contribution into your pension, basic rate tax relief will usually be added. Additional tax relief can be claimed in your self-assessment if you are a higher (40%) or additional rate (45%) taxpayer. If you have not claimed the extra tax relief on contributions in the past, you can still claim relief for the previous three years.
  • Recover personal allowance or child benefit: The personal allowance reduces by £1 for every £2 of income above £100,000 until it’s completely lost. Making a pension contribution can reduce an individual’s taxable income and restore some or all of the personal allowance. Similarly, you begin to lose child benefit if one family member’s income is above £50,000 a year. Making a pension contribution can bring income down below £50,000 to retain child benefit. You will also receive tax relief on the pension contributions. 

Annual Allowance

Although pension savers may receive tax relief on contributions, there is a limit which impacts on the tax efficiency of pension contributions without incurring an income tax charge. This limit is called the annual allowance and is currently £40,000 per annum for the 2018/19 tax year.

Tapered Annual Allowance

The government has now restricted pension tax relief from tax year 2016/17 for individuals with income (from all sources including salary, dividends, rental income and employer pension contributions) exceeding £150,000 per annum. When an individual is subject to the tapered annual allowance, their annual allowance of £40,000 is reduced by £1 for every £2 of income over £150,000. The maximum reduction is £30,000, meaning someone with an income of £210,000 or more would have an annual tax relievable pension contribution allowance of just £10,000 per year.

Money Purchase Annual Allowance

There is now a further consideration for those who have flexibly accessed their pension savings and have or are drawing an income under a drawdown arrangement. Effective from 6th April 2017, such individuals are currently restricted to an annual allowance for contributions to money purchase pensions of £4,000 per annum; this is a reduction from £10,000 per annum which applied for tax years 2015/16 and 2016/17.

Carry Forward of Unused Allowance

Carry forward allows pension savers to contribute more than the annual allowance without incurring tax charges. Where some or all of the annual allowance for a particular tax year is not used, this unused allowance can be carried forward from the previous 3 tax years. This unused allowance can only be carried forward once the full annual allowance for the current tax year has been used. This valuable facility enables individuals to make larger contributions than that permitted under the current year’s allowance.

The Lifetime Allowance

The lifetime allowance is £1,030,000 for the 2018/19 tax year and increases in line with the Consumer Price Index (CPI), rising to £1,055,000 for the 2019/20 tax year. There may be an opportunity to protect some or all of your pension savings if you have been affected by the previous lifetime allowance reductions in 2014 and 2016.

Fixed Protection 2016

If you have stopped making pension contributions or stopped accruing benefits with effect from 6th April 2016, you may be able to apply for Fixed Protection 2016 of the lifetime allowance at £1.25 million which is still available.

Individual Protection 2016

If you have pension savings of more than £1 million on 5th April 2016, you may be able to apply for Individual Protection 2016. Individuals who apply will be given a protected lifetime allowance equal to the amount of their savings at 5th April 2016, capped at an overall maximum of £1.25 million. It is possible for those with this protection to make further pension contributions or accrue additional defined benefit rights after 5th April 2016.

 

Charles Stanley is not a tax adviser.  Information contained in this article is based on our understanding of current HMRC legislation.  Tax reliefs are those currently applying and the levels and based of taxation can change.  Tax treatment depends on the individual circumstances of each person or entity and may be subject to change in the future.  If you are in any doubt, you should seek professional tax advice.

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