This may be your last opportunity to get 40% and 45% tax relief on your pension contributions. Use it before you lose it!
The chancellor, George Osborne’s focus has concentrated on reducing the budget deficit. One area which seems very likely to come under the microscope in the upcoming budget on 16 March is tax relief paid on pension contributions.
The current system which gives people tax relief at their marginal rate of income tax, means those paying higher rates of tax receive more relief. Higher rate tax-relief is estimated to cost the government around £7 Billion a year whilst the total cost of pension tax relief to the treasury is thought to be around £35 Billion a year and would therefore appear to be an easy target for a chancellor keen to make radical changes whilst he is at the helm of the treasury.
At this stage there has been no clear indication as to how these changes will manifest themselves, however there has been speculation about some possible changes.
- Flat Rate Tax Relief – Unlike the current system tax relief would be paid at the same rate for everyone which, if implemented, is likely to be in the region of 25%-33%. This move has been mooted for some time with former pension minister Steve Webb previously calling for a flat rate of 30%.
- Pension ISA’s – Under this proposal tax relief would be removed altogether with the money held within a pension growing tax free before being withdrawn entirely tax free. Opponents to this proposal include current pension minister Ros Altmann who has expressed her support for a regime that leaves pension income taxed because it stopped people withdrawing too much of their pension pots.
- Flat Rate Annual Allowance – Another approach, rather than playing with the rates of tax relief paid, is to reduce the maximum amount which can be paid into a pension from the current level of £40,000
Consensus appears to favour the flat rate tax relief option as this would have the double impact of benefitting lower earners and those at the start of their careers and helping to boost their funds for retirement, however we will not know for sure until Osbourne stands up to present his budget.
In anticipation of the impending budget and end of tax year we have highlighted some pension funding strategies which may be appropriate for those wishing maximise payments into their pensions before 5th April 2016:
1. Tax relief at highest rates
- Due to the likely drop in tax relief they are able to claim, additional rate and higher rate taxpayers may want to maximise pension contributions now
2. Don't miss the chance for a £50k carry forward at the 40% and 45% tax relief
- The maximum carry forward of unused allowances for the current year is £140,000, being £50,000 from each of the 2012/13 and 2013/14 years plus £40,000 from 2014/15.
3. Annual allowance cut for higher earners
- High income clients will face a cut in the amount of tax-efficient pension saving they can enjoy from 6th April 2016. The £40,000 Annual Allowance will be reduced by £1 for every £2 of 'income' clients have over £150,000 in a tax year, until their Annual Allowance drops to £10,000 at £210,000 of income and above.
4. Additional Annual Allowance for 2015/16
- To achieve the full alignment of pension input periods (PIPs) with the tax years from April, the transitional rules for the current year could see some clients able to pay an additional £40,000 into their pension before 6 April 2016.
5. Boost SIPP funds now before accessing flexibility
- Anyone looking to take advantage of the new income flexibility for the first time may want to consider boosting their fund before April, potentially sweeping up this years full £40,000 plus any unused allowance carried forward from the last three years. Once ‘income' has been accessed the annual allowance for money purchase schemes will drop to £10,000 and any unused carry forward allowances will be lost forever.
6. Sacrifice bonus for an employer pension contribution
- The employer and employee NI savings made could be used to boost pension funding, giving more in the pension pot for every £1 lost from take-home pay. And the client's taxable income is reduced, potentially recovering personal allowance or avoiding the child benefit tax charge.
7. Dividend changes and business owners
- An employer pension contribution enjoys the same NI savings as paying themselves a dividend but, more importantly, is not taxable in the director's hands. Currently directors pay no additional tax on dividends which sit below the higher rate threshold. From April, all dividend income greater than any unused personal allowance and the new £5,000 allowance will be taxable.
8. Recover personal allowances
- Pension contributions reduce an individual's taxable income. So they're a great way to reinstate the personal allowance.
9. Avoid the child benefit tax charge
- By making a one off pension contribution individuals can ensure that the value of child benefit is saved for the family, rather than being lost to the child benefit tax charge by reducing their net adjusted income. In practice this could be as simple as redirecting existing pension saving from the lower earning partner to the other.
How Willis Wealth Management can help?
Pensions remain the most tax efficient way to save for retirement. The new freedoms have removed any lingering barriers to accessing funds and passing on unused funds on death. With further cuts to funding limits around the corner, maximising pension funding becomes a must this tax year end.
By reviewing your circumstances and existing arrangements we can help you to make sense of the rules and ensure you are able to plan your retirement effectively and take advantage of the opportunities which exist before it is too late.
Please call us on 02890 329042 to see how we can help you.