At the beginning of every tax year your pension allowances refresh, bringing you opportunities to maximise your pension tax relief.
The rules are now even more generous than before:
- The Annual Allowance (AA) has increased from £40,000 to £60,000 – meaning that you can now pay in £48,000 with the government adding a further £12,000. If you are a higher rate taxpayer further tax relief may be due.
- Those with adjusted income in excess of £360,000 can now pay £8,000 (with the government adding £2,000) into a pension each year. It is hoped that increasing the limit from £312,000 to £360,000 will exempt many taxpayers from the ‘Pension Savings Tax Charge’.
- The lifetime allowance (LTA) tax charge on pension savings exceeding £1,073,100 no longer applies. LTA is expected to be formally abolished in 2024, although a new Labour government is committed to reinstating this. This means that you might be able to make additional pension contributions – depending on how you have accessed your pension savings – without losing the benefits of LTA protection. You could also enrol in a new pension scheme.
- The ability to withdraw 25% of your pension savings as a tax-free lump sum will be capped at £268,275. However, if you hold a protection against the LTA – such as enhanced protection, fixed protection, or individual protection – it is likely you will be entitled to a higher tax-free lump sum.
Don’t forget that personal contributions cannot exceed your earnings. However, more could be paid if you operate your business through a limited company providing your overall remuneration package reflects the work you carry out for the business.
If you have no earned income, you can still pay £2,880 annually and the government will add £720.
Using pensions to mitigate Inheritance Tax (IHT)
Pensions are usually exempt from IHT which is why they are an important part of estate planning. If the pensioner dies under the age of 75 there is no charge when the beneficiary draws the remaining capital, whereas if death occurs over the age of 75 the beneficiary is taxed at their marginal tax rate on any amounts drawn. Remember, it is important to nominate a beneficiary to receive your pension, to ensure your money goes to the right people.
If an individual holds both ISA savings and a pension, they could prioritise spending ISA savings and leave pension savings intact to pass to the next generation. However, this is an area where specialist advice is required – we work alongside leading IFAs to help you plan for your retirement and beyond with tax efficiencies in mind.
You can hear more about pensions on our CKLG podcast, click on the icon to listen to our experts being interviewed on Cambridge 105.
If you would like us to help you manage your position, call a private client tax specialist on 01223 810100 for friendly help and guidance.
