Tax Relief on Contributions
Tax relief on pension contributions is available to UK tax-payers. This means that tax you would have had to pay to HMRC goes into your pension instead. You can put as much as you want into your pension however there are annual and lifetime allowances that restrict the amount of tax relief allowable on contributions.
What is the annual allowance?
You can receive tax relief on pension contributions up to 100% of your earnings or the £40,000 annual allowance as of the tax year 2017/2018. Any contributions over this threshold will be subject to income tax at the highest marginal rate.
Can I use a previous year’s annual allowance?
Yes. You can carry forward any unused annual allowances from the previous three tax years, not including the current tax year. This applies as long as you were a member of a pension scheme during those years.
However, there can be occasions where your annual allowance is reduced to £4,000. This is known as the Money Purchase Annual Allowance (MPAA). For more guidance on making contributions in to your pension contact us.
Tax Relief on Capital Gains Tax (CGT)
Any growth made within a pension is considered free of CGT making it a fantastic investment vehicle to accumulate your retirement funds.
Tax Relief on Inheritance Tax (IHT)
With recent changes to pension rules, the tax treatment of pensions on the death of the policyholder has changed. The ‘death tax’ of 55% has been abolished meaning pension benefits can now be paid out in some circumstances tax-free. The result of this – your pension could now act as a vehicle to mitigate IHT.
Contact us to find out more information on IHT benefits when investing into a pension.
Tax in Retirement
In retirement you still have to pay income tax. This not only applies to your personal pension(s), but also the State pension and any occupational pension schemes you may have. However, some pension income such as the state pension is paid gross (without any tax being deducted). But if tax is due on this, HMRC will collect this from you by deducting this from any company pension payments or when you withdraw money out of an occupational scheme.
How are pensions taxed?
You can take 25% of your pension pot tax-free and the remaining pot which is typically used to provide income (but can be withdrawn as a lump sum) is taxable at your highest marginal rate.
Lifetime Allowance (LTA)
The lifetime allowance is the maximum limit that your pension benefits can be valued at without the possibility of having to pay a tax charge. If your pension is valued at greater than the current lifetime allowance then it will be subject to a hefty tax of 25% if taken as income, or 55% if paid as a lump sum.
As of the 6th April 2016, the lifetime allowance reduces further from £1.25m to £1m following the new changes in the summer budget. This new change brings with it new methods of protection for individuals who may be affected by this reduction depending on the value of your fund at 5th April 2016.
If you expect your total pension savings to exceed £1.25 million then you may need to apply for protection. For more information speak to one of our Wealth Managers who can provide bespoke advice on protecting your retirement fund.