Maximising Tax Relief with Pension Contributions

Contributing into a pension scheme is a great way to get tax relief providing you stay within your annual allowances, and is more popular now that you can withdraw a tax free lump sum of up to 25% of your pension fund when you are 55 years old.

Personal pension contributions have the effect of increasing your tax bands, increasing the amount of income you can earn at the basic rate of tax (20%) before falling into higher rate tax (40%). For higher rate tax payers this can extend the amount of income that can be earned before falling into additional rate tax (45%).

However, there is an annual allowance on the amount of tax relief that can be obtained from pension contributions. The standard annual allowance limits relief on contributions into pension schemes at £40,000 (this includes employee and employer contributions into occupational pension schemes). Unused annual allowances for the previous three years can also be utilised where the individual has been a member of a pension fund in those periods. Contributions in excess of the annual allowance will be taxed as additional income on the individual.

Before contributing into a pension scheme ensure that you know what your annual allowance is and how much allowance is available from the previous three years. For high earners with income over £110,000 the annual allowance may be reduced, depending on the level of income, to a minimum of £10,000. If you are already drawing down on a pension the annual allowance can be limited to £4,000.

The excess contributions are taxed at your highest rate of tax so it is worth seeking advice from a financial planner before making contributions if you think you may be nearing your annual allowance.

The content of this article is for general information only and does not constitute tax advice. It should not be relied upon and action which could affect your business should not be taken without appropriate professional advice.

Written by Danny Henville ACCA

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