In this month’s Budget the Chancellor didn’t announce any further amendments to tax relief for pensions but we are already facing some significant changes set to come into force from 6th April 2016.
Reduction in Annual Allowance
Currently, you can claim tax relief on pension contributions for up to £40,000 each year, with the ability to carry forward any unused relief for a further 3 tax years.
However, with effect from April, if your total income, including any pension contributions made by your employer, exceeds £150,000, this limit will start to reduce until it reaches a minimum of £10,000.
As rules currently stand, you will still be able to use up your relief from previous years but a high earner will soon be severely restricted in the amount of tax relief they can claim.
Reduction of Lifetime Allowance
The lifetime limit for pension savings has been reducing over the past few years and currently stands at £1,250,000; once your fund reaches this amount, any excess can be taxed quite heavily when you take any benefits.
From April, this limit reduces to £1,000,000. There are elections available to protect the higher limit if your pension savings already exceed £1,000,000.
What to do now
Consider using your Annual Allowance of £40,000 for 2015/2016, together with any unused allowances brought forward; as a minimum, try to use up relief from 2012/2013 as this will definitely disappear in April.
If you used your Annual Allowance for 2015/2016 before the Summer Budget in July, you may still be able to make further contributions before 6 April; check if this applies to you as you could invest up to £80,000 this year.
Tax relief on your own, personal, contributions are limited to the level of your earned income (this excludes dividends) but your employer can pay more on your behalf; consider getting your employer to pay contributions to a scheme to use up the relief if your earnings are low. This will be especially useful if your personal company has a pension scheme which can own the commercial property you trade from.
If you would like to make a pension contribution before the end of the tax year, please contact us and we can discuss the reliefs you have available.
