From 6 April 2014, the maximum you can pay into your pension (the Annual Allowance) and the maximum limit on total pension savings (the Lifetime Allowance ) are both reducing, which could result in unexpected tax charges. However, there are steps you can take to avoid these tax charges and PR&W can help minimise the impact on you. We can also help you capitalise on any opportunities these changes present.
This pension update focuses on the reduction in the Annual Allowance.
Reduction in the Annual Allowance
The Annual Allowance is a cap on the maximum contribution you can pay into a UK pension without incurring a tax charge. The limit is currently £50,000, but it is reducing to £40,000 on 6th April 2014. If you exceed the Allowance, you could be subject to a 40% tax charge on the excess. You can also “carry forward” any unused allowance from the previous three tax years.
Tax relief is granted at your highest rate of income tax, meaning that you could benefit from 45% tax relief. For high earners, the tax relief is significant. For example, someone earning £200,000 per annum making a pension contribution of £50,000 gross could benefit from tax relief of £22,500. This would mean that an investment of £50,000 would cost only £27,500.
Individuals accruing benefits in final salary schemes may be breaching the Allowance without realising, and others will be caught out from April 2014 onwards. The method for calculating the amount of the Allowance used each year under this type of scheme is not straightforward, as it is based on the increase in the value of your pension over the year, not on how much you contribute.
If you do not take any action, you could end up with a large tax bill simply by being a member of your employer’s pension scheme.
Maximising your contributions under the current allowance is therefore advisable, as this is a generous tax break that is likely to be subject to further restrictions in the future.
If you are in a Final Salary or Defined Benefit pension scheme, you should seek advice to avoid any nasty surprises.
PR&W can calculate the maximum contribution to ensure you benefit fully from this tax break and we can advise you on avoiding any unnecessary tax charges.
Please contact us to arrange an appointment with one of our financial planners.