As the end of the tax year approaches, it’s the perfect opportunity to maximise your pension contributions and benefit from the tax relief available. Pensions are not only a great way to secure your financial future but also one of the most tax-efficient ways to reduce your tax bill. Here’s how you can make the most of pension savings before the deadline.
Pension Annual Allowance
The current pension annual allowance is £60,000 or 100% of your earnings, whichever is lower. This is the maximum amount you can contribute to your pension each year and still benefit from tax relief. For higher earners, this can be a significant opportunity to reduce taxable income while building long-term savings.
If you’ve already contributed the maximum allowance this tax year, don’t forget you may be able to use the carry forward rule. This allows you to use any unused allowance from the previous three tax years, provided you’ve been a member of a registered pension scheme during those years.
Pension Tax Relief
When you contribute to a pension, you automatically receive 20% tax relief, boosting your contributions instantly. Higher-rate and additional-rate taxpayers can claim an additional 20% or 25% through their self-assessment tax return, reducing the net cost further. For example, a £10,000 pension contribution could effectively cost a higher-rate taxpayer just £6,000. However, the position may differ for some arrangements, such as salary sacrifice, where contributions are made before tax and National Insurance, providing immediate full tax relief without the need to claim via self-assessment. If you’re using salary sacrifice, it’s important to understand how it affects your total tax savings and overall pension strategy.
Tapered Annual Allowance
High earners with an adjusted income over £260,000 and threshold income over £200,000 may have their annual pension allowance tapered down to a minimum of £10,000. Adjusted income includes all taxable income plus employer pension contributions, while threshold income excludes employer contributions but includes personal ones. If your threshold income exceeds £200,000, it’s crucial to calculate your adjusted income carefully to determine if your annual allowance will be reduced.
Find out more in our factsheet here.
Money Purchase Annual Allowance (MPAA)
If you’ve started taking money from your pension beyond your tax-free lump sum, you may have triggered the Money Purchase Annual Allowance (MPAA). This may reduce your annual pension contribution limit to £10,000, restricting how much you can save tax-efficiently into your pension each year. If you’re affected by this, you may need to explore alternative ways to save for retirement, such as ISAs or other long-term investment options, to supplement your pension savings.
IHT on Unused Pensions
The government has proposed changes in the Autumn Budget 2024 that could make unused pension assets subject to Inheritance Tax (IHT) from 6 April 2027. While the details are still under consultation, these changes may significantly impact wealth transfer strategies, particularly for those who plan to pass on pension savings tax-efficiently. If you’re concerned about how this could affect your estate planning, now is the time to review your options and seek professional advice. The full details are not yet confirmed, but acting early can help you prepare for any legislative changes.
More details have been provided here.
Find Out More
Making the most of your pension allowances before the tax year ends can have a significant impact on both your tax bill and your long-term financial security. With complex rules and limits, it’s essential to act early and seek advice to avoid missing out on valuable opportunities.
To discuss any of the issues raised in this article, please contact us. More information on Pensions can be found on gov.uk.
See the other topics in our Bitesize Tax Planning series:
Personal Reliefs
- Check Your Tax Code
- Personal Allowances
- High Interest Savings
- Dividend Allowance
- Gifting
Planning for Retirement
Employee Benefits
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Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.
The Financial Conduct Authority (FCA) does not regulate tax advice, estate planning, trusts or will writing.
The content in this article is for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice.
Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
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