5 reasons to maximise your annual pension contributions before year-end
As the end of the tax year approaches, here at Marchwood IFA we have identified 5 reasons why you might want to consider making the most of your pension contributions now. If you are interested in doing so, you should take the advice of a fully qualified pensions advisor to help you make the right decisions to achieve your retirement goals.
Remember that higher rate (40%) tax payers and additional rate (45%) tax payers who use the full £50,000 pension annual allowance can convert a tax bill of £20,000 (40% of £50,000) into their own retirement savings.
1. Make the most of the £50,000 pension allowance this tax year before it is reduced to £40,000 next tax year
The amount of your pension savings that benefits from tax relief is limited to an annual allowance, currently £50,000. From tax year 2014-15 onwards the annual allowance will go down to £40,000. This applies to pension savings in a registered pension scheme or an overseas pension scheme – as long as either you or your employer qualify for UK tax relief on those pension savings.
If you save more than this annual allowance you may have to pay a tax charge on the excess.
2. Carry forward any unused allowances from the last 3 years
Unused annual pension allowance from 2010-2011 must be used up this tax year; use it or lose it! For a higher rate tax payer, this could mean missing an opportunity to save up to £50,000 at a net cost of £30,000.
Note that the amount you can carry forward for the 3 previous tax years back to 2010-2011 will still be based on a £50,000 allowance. But the new £40,000 limit will, over time, be included in the calculation and reduce what can be carried forward. Up to £200,000 (4 years x £50,000) can be paid into your pension in this tax year without incurring an annual allowance tax charge. By 2017/18 this will drop to £160,000 (4 years x £40,000) and that is only if the allowance stays at £40,000 and is not cut any further.
3. Get personal tax relief at top rates this year in case you earn less next year
Does your remuneration fluctuate with bonuses and commission or are you self-employed and have had a good year that you don’t necessarily expect to repeat? If you are a higher rate tax payer this year but are uncertain of your income level next year, a pension contribution now will secure tax relief at the higher rate.
If you have had a particularly good year – and want to pay more than your 2013/14 annual allowance – you might consider using next year’s pension allowance in advance. This would allow an extra £40,000 pension contribution to be paid in this tax year.
4. Pay employer pension contributions before corporation tax drops further
Corporation tax rates are falling and are expected to reach 20% by 2015. Companies should consider bringing forward pension funding plans into this tax year to benefit from tax relief at the current higher rates. For the current financial year, the main corporation tax rate is 23%. This drops from the new financial year starting 1st April 2014.
5. Sacrifice bonus for employer pension contributions
Have you been offered a bonus this year? Sacrificing bonus for an employer’s pension contribution before tax year end can bring several benefits. The employer and employee National Insurance savings could be used to boost pension funding, giving more in the pension pot for every £1 lost in ‘take-home’ pay. In addition, your taxable income is reduced, potentially taking you under a specific tax threshold which could mean avoiding the child benefit tax charge.
Pensions planning is a complex area and one where you should always take the professional advice of a fully qualified independent pensions advisor. Please call Marchwood IFA now and ask us to review your pension arrangements. We can help you make the right decisions to help you achieve your retirement goals.