By Justin Rourke, senior financial planning manager at Armstrong Watson
As the government starts to explore ways to repay the mounting debt from coronavirus, one area which may be under the spotlight in the Budget planned for March 3 is a potential reduction to tax relief on pension contributions.
But why is this of such importance?
Firstly, pensions are very tax-efficient.
Right now all contributions within allowance limits receive tax relief from the Government payable at up to your highest rate of tax.
For example, it would only cost a basic-rate taxpayer £8,000 to contribute £10,000 into their pension because they would receive basic rate tax relief at 20 per cent.
A £2,000 immediate uplift just by making the contribution.
For higher earners, it is even better, with higher-rate taxpayers able to then claim back up to a further £2,000 and additional-rate taxpayers up to a further £2,500 via self-assessment, on the same level of contribution.
Tax relief is given on personal contributions up to 100 per cent of your earnings (or £3,600 if greater).
However, if total contributions from all sources, including your employer if applicable, exceed the Annual Allowance you will suffer a tax charge on the excess funding.
In addition to the limits determined by your earnings the Annual Allowance is a ceiling on how much can be paid into a pension arrangement on which you can receive tax relief.
It’s currently set at £40,000, however, most people do not currently contribute anywhere near this level to fully utilises their annual allowance.
If you’ve not used your full Annual Allowance in the current or any of the previous three tax years, you can legitimately pay in more than the annual limit by utilising Carry Forward.
This allows, in this example for high earners, up to £160,000 in total to be contributed. For a higher rate tax payer this pension contribution costs only £96,000 net with total tax relief of £64,000 gained.
The maximum you can carry forward depends on how much Annual Allowance you have left.
You must first use up the Annual Allowance in the current tax year before going back as far as the three previous tax years.
When working this out, you should include any pension contributions made personally as well as your employer, plus pension benefits built up in a final salary pension scheme.
High earners
In last year’s Budget, the Chancellor announced a relaxing of the high earner contribution rules on how much can be saved into their pensions while receiving tax relief for the 2020/21 tax year, Threshold Income limit of £200,000 and Adjusted Income limit of £240,000.
Only when both of these limits are breached will a person be subjected to Tapered Annual Allowance ie a reduction in their Pension Annual Allowance down to £4,000.
However, this could also potentially be reviewed in the budget to help balance the books.
Pensions continue to offer an extremely valuable and effective means of retirement saving for most people.
The state pension, which for many now won’t become payable until their late 60s, isn’t sufficient to maintain a comfortable lifestyle.
If you have the chance to make some additional contributions, including catching up on unused allowances, now might be the time to do so before the end of the current tax year.
At Armstrong Watson, our quest is to help our clients achieve prosperity, a secure future and peace of mind.
Our guidance for anyone considering taking personalised financial advice and planning for retirement is that now may be a good time to consider this whilst all the current existing reliefs and allowances remain available for those who are in a position to take action.
Contact Justin by emailing justin.rourke@armstrongwatson.co.uk or call 01768 222030.
