The way time flies these days, the end of the tax year will be with us quicker than we realise. So it would be prudent to consider what can be done to make the most of your pension contributions before April 5th. We also have a slightly earlier budget on March 8th which may affect pension legislation.
Pensions are the most tax efficient way to save for retirement. And the new freedoms have removed any concerns about accessing funds and passing on unused money on death.
1. Tax relief at highest rates
Successive Chancellors have decided against cutting the rate of tax relief on pension saving. But with the spotlight constantly falling on pension saving incentives at each Budget, relief at the highest rates may not be around forever.
An additional or higher rate taxpayer may want to contribute to maximise tax relief at 45%, 40% or even 60% while they have the opportunity.
2. Last chance for a £50k carry forward
This tax year is the last opportunity to carry forward unused annual allowance from 2013/14 tax year when it was £50k. If it isn’t used, the additional allowance will be lost and future carry forward limited to a maximum of £40k per year.
The maximum carry forward of unused allowances for the current year is £130,000, being £50,000 for 2013/14 plus £40,000 from 2014/15 and 2015/16.
3. Recover personal allowances
Pension contributions reduce your taxable income. So they’re a great way to reinstate your personal allowance.
For a higher rate taxpayer with taxable income of between £100,000 and £122,000, a personal contribution that reduces taxable income to £100,000 would achieve an effective rate of tax relief at 60%.
4. Avoid the child benefit tax charge
A personal contribution can preserve the value of child benefit, rather than being lost to the child benefit tax charge.
Child benefit, is worth over £2,500 to a family with three children, it is cancelled out by the tax charge if your taxable income exceeds £60,000. As a pension contribution reduces ‘income’ for this purpose, the tax charge can be avoided. The combination of higher rate tax relief on the contribution plus the child benefit tax charge saved, can lead to effective rates of tax relief as high as 65%.
5. Dividend changes and business owners
As a director of a small or medium sized company you may be facing an increased tax bill following changes to the taxation of dividends. A pension contribution could be the best way of cutting your overall tax bill, while still receiving the same level of income.
There’s no NI on an employer pension contribution or dividend payment, but dividends are paid from profits after corporation tax and are subject to personal tax too. By making an employer pension contribution, this ensures that the tax that would have otherwise gone to HMRC boosts your retirement savings instead.
6. Pay employer contributions before corporation tax relief drops
Corporation tax rates are set to fall from 20% to 19% from the new financial year with a further planned cut to 17% to effect from April 2020.
Companies may want to consider bringing forward pension funding plans to benefit from tax relief at the higher rate. Payments should be made before the end of the current business year, while rates are at their highest.
7. Providing for loved ones
The new death benefit rules will make pensions an extremely tax efficient way of passing on wealth – there’s typically no IHT payable and the funds can be passed to any family members free of tax on death before age 75.
So lots of good reasons to sort out your pension contributions before April – do it today!
If you have any questions on this blog or any other financial matter please leave a comment below or contact Savvy directly.