Year End Tax Planning
There are many opportunities for pension planning but the rules can be complicated and are about to change.
The rules include a single lifetime limit of £1.5 million on the amount of pension saving that can benefit from tax relief as well as an annual limit of £50,000 on the maximum level of pension contributions. The annual limit includes employer pension contributions as well as contributions by the individual. Any contributions in excess of the annual limit are taxable on the individual.
Tax relief is currently available on pension contributions at the taxpayer's marginal rate of tax. Therefore a higher rate taxpayer can pay £100 into a pension scheme at a cost of only £60. An additional rate taxpayer can pay £100 in at a cost of only £55. Indeed for some individuals, due to the complexity of the tax system, the effective relief may actually exceed 45%.
As it is widely acknowledged that governments generally are unable to provide adequate levels of retirement pensions, it is more important than ever to provide for a secure old age.
All individuals, including children, can obtain tax relief on personal pension contributions of £3,600 (gross) annually without any reference to earnings. Higher amounts may be paid based on net relevant earnings. There is no facility to carry contributions back to the previous tax year.
Directors of family companies should, as an alternative, consider the advantages of setting up a company pension scheme or arrange for the company to make employer pension contributions. If a spouse is employed by the company consider including them in the scheme or arranging for the company to make reasonable contributions on their behalf.
Changes from 6 April 2014
From 2014/15 the standard lifetime allowance of £1.5 million is reduced to £1.25 million and the annual allowance of £50,000 is reduced to £40,000. However, for those who have significant pension savings it may be possible to protect an increased entitlement by utilising 'fixed protection' (FP2014). FP2014 entitles an individual to a lifetime allowance of £1.5 million. Applications for this protection need to be received by HMRC before 6 April 2014 so you may need to act quickly if this is likely to affect you. Any new pension savings made from 6 April 2014 are likely to lead to the loss of this fixed protection.
In addition to FP2014 an alternative individual protection (IP14) is also being introduced. This provides an individual who has pension savings of between £1.25 million and £1.5 million as at 5 April 2014, with a personal lifetime allowance based upon the pension savings at that date. In contrast with FP2014, contributions can be made although when benefits are taken any pension savings above the individual's personal lifetime allowance will be subject to a charge which can be up to 55%.
We would be happy to advise you on your pensions position.