Time to maximise your pension contributions?
With the 5th of April fast approaching, now may be the time to review the level of pension contributions made during the tax year and ensure any available tax relief is maximised. There have been a number of recent announcements restricting both the annual allowance and lifetime allowance for pension contributions. It is also widely anticipated that next week's budget will contain measures to restrict the tax relief on pensions even further.
To recap, the current annual allowance for all individuals is £40,000. This means that gross contributions can be made up to this amount and tax relief can be obtained at your applicable tax rate. If the annual allowance is exceeded, any tax relief obtained on the excess will be clawed back when completing your self assessment tax return. Some individuals may have unused annual allowance from the previous three tax years which can be used to increase this level.
However, it was announced in the summer budget 2015 that from 6 April 2016, the annual allowance will be restricted for individuals with an income in excess of £150,000 in a tax year. For every £2 of income over this threshold, affected individuals will lose £1 of their annual allowance down to a minimum of £10,000. Any individuals falling into this category may wish to consider making additional contributions prior to 5 April 2016.
It is important to note that the tax relief personal pension contributions are also limited to the lower of £3,600 or 100% of your relevant earnings. Relevant earnings include income sources such as salary or self employment income but will not include investment income such as dividends.
In the lead up to the 2016 budget, there has been a lot of speculation as to whether the tax relief on pensions will be restricted any further. It has been suggested that the Chancellor may look to limit the tax relief on pensions to the basic rate of tax (currently 20%) for all individuals regardless of their tax status.
The taxation of pension contributions can be a complex area with a number of restrictions to be aware of, therefore it is important to take professional advice if you have any doubt.
If you would like to discuss any of the announcements or make additional pension contributions then please contact your local Perrys branch and we will be happy to assist you.
Article written by Craig Harman