Ross McConnell - Kinross Based Chartered Accountant

Pension Contributions

by ROSS MCCONNELL on MAY 06, 2019

Contributing To Unexpected Tax Bills?

The focus on pension earnings has never been higher, as the government introduces measures to ensure that we are all saving regularly to help fund the lifestyle we plan to enjoy throughout our retirement years. 

And as our incomes rise – hopefully – throughout our working lives, you might be aware that you can save increasing amounts towards your pension each year, using additional voluntary contributions (AVCs), and take advantage of regulations to benefit from a reduced tax bill; with your pension contribution exempt from income tax. 

What could be better?

But the one certainty in life, as we are often reminded, is the taxman’s interest in our affairs.

Here, I’m talking specifically about the Annual Allowance on pensions.

Under current tax rules, you can pay a maximum of £40,000 into your pension in any tax year: but if your annual income is above £110,000  – known as the Threshold Income – then the amount you can pay in is reduced.

Individuals who have an ‘adjusted income’ greater than £150,000 – income which includes contributions to your pension by your employer ¬– have their Annual Allowance reduced from £40,000 to £10,000. This is known as tapering.

So, if your salary is less than £110,000, your Annual Allowance is £40,000 – which includes any employer contribution. If your salary goes above this, then your Annual Allowance for pension will be tapered in that tax year. 

At this point, I should add that if your Allowance was £40,000 last year as well, but you only made a contribution of, let’s say, £30,000, then you can carry forward the unused £10,000 allowance into this tax year. This additional element can be claimed for up to three preceding tax years, which means it can get complicated in preparing your tax return.

If you’re still with me, well done. But you’re probably now appreciating that this is an area where our professional advice can be extremely helpful in helping you make the best of the regulations to provide for your retirement.

If you are one of the few to still be within a final salary pension schemes – which might include doctors or dentists of a certain age – this advice is especially important. I’ve come across a number of NHS GPs and consultants who are being faced with high tax bills because of their combination of high income and high pension contributions. Under the NHS scheme, the value of the employer contributions is not straightforward and can only be determined after the year-end. 

Regardless of your occupation, if the combination of your income plus pension contributions goes over £150,000 then you can only pay in £10,000 to your pension. Above this, any contribution made will still be liable to tax at your highest tax rate.

The resulting tax bill can come as a huge shock.

So if you are lucky enough to still be a member of a final salary scheme, or if you’re earning above £100,000 a year, or if you’re employed as a consultant, dentist or doctor by the NHS, then you should check to see if this tax is going to affect you. 

Call us today and we can help you confirm if any planned pension contribution could leave you with a large but unexpected tax bill a little further down the line.

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