Contributing to a pension has always been a favoured way to mitigate paying tax, due to the reliefs offered by HMRC. Subject to a maximum of £40,000 for each ‘input period’, the current reliefs are broadly:
- Personal contributions (subject to 100% of earnings or £3,600 if higher) attract basic rate tax relief in the fund, (ie there is a 20% uplift in the funds available for investment as the basic rate tax relief is reclaimed). Higher and additional rate tax relief is claimed on your tax return.
- Employer contributions can be treated as a business expense and therefore the Company can claim Corporation Tax relief on the contributions. It is possible to ‘carry forward’ unused relief from the previous 3 tax years which means up to £180,000 can be contributed this tax year to a money purchase pension.
- Over the last 5 years the Government have pared back the contribution and savings limits available for pension investors, driven by the desire to cut public spending and reduce the deficit. This theme is set to continue from the end of this tax year meaning there is added impetus to top-up pensions prior to then.
Some reasons to consider topping-up pensions prior to the end of the tax year
The Budget last July included proposals to restrict the amount of tax relievable pension contributions from 6th April 2016 from the current annual allowance of £40,000, to a tapered allowance of as little as £10,000. The annual allowance will be reduced by £1 for every £2 of ‘adjusted income’ over £150,000, until the allowance drops to only £10,000. (Adjusted income is total taxable income from all sources including pension contributions, and anyone with taxable earnings over £110,000 will be affected).
The Chancellor also announced in the Budget that pension input periods will be aligned with the tax year from 2016/2017, meaning that the annual allowance for tax year 2015/2016 is up to £80,000 rather than £40,000. Those who made a pension contribution of between £40,000 and £80,000 between 6th April 2015 and 8th July 2015 therefore could have a further opportunity to contribute and gain further tax relief before the end of the tax year.
The ability to contribute up to £180,000 using the ‘carry forward’ rules will reduce to £170,000 from 6th April 2016.
In July 2015 the Government opened a Consultation on the future of pension tax relief. Their response to this is expected in March and there is an expectation that current rates of tax relief will be reduced or possibly for relief to be completely reformed altogether, potentially with the creation of a pensions ISA. There is therefore the opportunity to contribute before any change and make the most of the current rules.
To conclude, we are in an environment where the Government views pension savings and the reliefs currently available as an easy target to cut spending and raise revenue. It is therefore important to review your potential to make further pension contributions up to 5th April and take the opportunity to benefit from the reliefs currently available.
If you would like to discuss this further please contact your usual Prydis consultant.