Maximise pension contribution tax relief and protect your Pension Lifetime Allowance
19th January 2016
Between now and the Budget on Wednesday 16 March 2016 there is an opportunity to address two critical issues for pension planning:-
1. Maximise contributions, and receive tax relief on those contributions.
2. Implement appropriate Lifetime Allowance (LTA) protection to reduce or avoid paying a charge on the amount of total pension funds which exceeds the LTA.
It seems likely there will be further significant pension reforms announced in the Budget scheduled for Wednesday 16 March 2016. The Government has consulted widely however it is unclear whether this will result in the removal tax relief on contributions altogether or some further limitations to the level of contributions receiving relief or the extent of the relief – possibly limited to basic rate or a flat rate relief.
Whichever option is chosen there is likely to be further complexity and a transition period.
Between now and then there is an opportunity to make contributions and receive tax relief in its current form; for employee contributions, up to 100% of earnings for the current tax year, subject to annual allowance rules, and for employers, who can potentially make large pension contributions and receive Corporation tax relief (subject agreement with the local inspector of taxes).
In either case, if you wish to make pension contributions and have the capacity to make contributions, now is the time to do so – boost your pension fund and reduce your tax bill!
Following hot on the heels of the Budget is the start of the new tax year on 6 April 2016.
This heralds two further tweaks to pension rules – the tapering of your annual allowance for contributions to pensions if your income is greater than £150,000 – this is your ‘adjusted income’*.
Secondly the further reduction in the LTA.
Lifetime allowance protection
The new tax year sees the introduction of the lower lifetime allowance of £1 million, down from £1.25 million. This is the limit above which your total pension fund will be subject to the aptly named Lifetime Allowance Charge (LTAC). If your combined pension assets are anywhere close to this figure you should consider taking action to avoid or at least minimise the effect of the LTAC.
For example if you have a combined pension pot of £800,000 a growth rate of 5% per annum compound over the next 5 years will take you over £1 million.
The importance of seeking independent financial advice is critical when making decisions about this so please get in touch on 01794 517066.
* the total amount of income for the tax year on which an individual is subject to income tax, which will include salary, bonus, profits from self-employment, benefits in kind, pension income (including uncrystallised funds pension lump sums), income from property, savings, dividends and taxable lump sum death benefits (post 5 April 2016) plus most pension contributions.
Important: This text does not constitute financial advice and individual advice should be sought before taking any action.