No-one knows how long the current system will continue, and so it makes sense to enjoy these opportunities while you can.
The amount that you can contribute to a pension and receive tax relief is known as the annual allowance. For most partners the annual allowance is £40,000. However, for ‘high earners’ the level of income above which your annual allowance starts to reduce remains at £240,000.
If your income is over £240,000, tapering gradually reduces your annual allowance by £1 for every £2 of income, from £40,000 to a minimum of £4,000 (the minimum applies if you have income of £312,000 or more).
Partners with income up to £240,000 should consider contributing up to their full annual allowance to take advantage of income tax relief at either 40% or 45%.
Alternatively, if cash flow now permits, and you wish to catch-up on contributions that you may not have been able to make in previous years, you are able to carry forward any unused annual allowance for the three previous tax years, as long as you held a pension plan in those tax years. The current year annual allowance must be fully used first and then carry forward can be used to increase the contribution, provided there is sufficient taxable profits for the contributions to be tax-relievable (contributions are treated as being paid in the tax year in which the payment is made).
Those partners with income above £240,000 and below £312,000 should consider whether they should amend their contributions so as to make full use of their annual allowance.
The annual allowance for Partners with income in excess of £312,000 remains unchanged at £4,000 per year and, if they have not already done so, may need to reduce or suspend regular contributions to avoid exceeding the annual allowance and incurring a tax charge.
Partners should check what unused annual allowance capacity they have in the previous three years and whether they can utilise it in the current year.
One of the challenges for Partners is that profit shares for the tax year are not usually disclosed until several months after the year end and this creates a challenge in trying to estimate earnings when determining pension contributions.
Where partners are, or may become, ‘high earners’ it is possible to reduce or suspend pension contributions. Most (but not all) pension plans allow this without charge and without penalty. Contributions can be made up later in the tax year, either by increasing monthly contributions or through paying lump sums prior to 5th April 2023. There is the ability to carry forward allowances for up to three prior tax years, and so any increased annual allowance can be utilised in a later year.
Please note that some pension contracts have inbuilt guarantees which are conditional on premiums being paid at the same level until the plan retirement date. Where premiums are reduced or ceased, these guarantees could be lost and you should check with your pension provider or financial adviser prior to cancelling or amending Direct Debit Mandates. Some pension providers may also ask for 10 days’ written notice prior to cancelling or amending a DDM.
Pension contributions remain an extremely tax efficient form of saving for retirement and where possible, Partners should ensure they maximise the amount they save into pensions.
Where income restricts tax-efficient pension contributions to just £4,000, you should consider whether these will enable you to build a fund which can provide you with the income you require in retirement.
Pension legislation and tax reliefs can be complex and careful consideration should be given prior to taking any action.
Our financial planning team can help you work out your annual allowance, any unused carry forward capacity, and then advise on adjusting your contributions accordingly. They can also help you consider other tax efficient savings vehicle which can be used towards your retirement plan.
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.
The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. Levels, bases and reliefs from taxation may be subject to change.
Please note the information contained is correct as at the date of this article.
The information set out in our publications is for information purposes only and does not constitute advice to undertake a particular transaction. Appropriate professional advice should be taken on specific issues before any course of action is pursued. Any advice provided by a Crowe Consultant will follow only after consideration of all aspect of our internal advice guidance.
Past performance is not a guide to future performance, nor a reliable indicator of future results or performance. The value of investments, and the income or capital entitlement which may derive from them, if any, may go down as well as up and is not guaranteed; therefore investors may not get back the amount originally invested.