This is great news as personal contributions can continue to benefit from income tax relief at your highest marginal rate, employers can benefit from corporation tax relief, the underlying pension funds grow free of income tax and capital gains tax, 25% tax free cash is still available and most pension funds sit outside of the estate for inheritance tax purposes.
No-one knows how long the current system will continue, and so it makes sense to enjoy these opportunities while you can. As a reminder, the maximum amount you can contribute to a personal pension or stakeholder pension plan, on which you can receive tax relief, is 100% of your earnings or £3,600 gross, whichever is greater. This is capped at the annual allowance which, for the 2022-23 tax year, is £40,000.
Pensions tax relief for high earners has been cut by introducing a tapered annual allowance for those with incomes of over £240,000. For every £2 of adjusted income over £240,000, the annual allowance is reduced by £1, down to a minimum of £4,000 where an individual has income of £312,000.
Where an individual is already in receipt of pension income, the money purchase annual allowance (MPAA) applies and the annual allowance is reduced to £4,000.
High earners retain the ability to carry forward any unused annual allowances from the previous three tax years and so larger contributions may be made, which will attract income tax relief of up to 45% (46% in Scotland).
You are allowed to carry forward any unused annual allowances from the previous three tax years, starting with the earliest year, in order to make a pension contribution in excess of the annual allowance.
It is still possible to use this carry forward even if you are subject to a tapered annual allowance. The maximum available amounts of unused relief remain at £40,000 tax years, 2019-20 and 2020-21, meaning that it may be possible to make a maximum pension contribution of up to £160,000 in tax year 2022-23.
However, if income has exceeded £210,000 in 2019-20 and 2020-21 and £312,000 in 2021-22 and 2022-23 the maximum pension contribution would be £22,000 (see table above). This is subject to the MPAA not having been triggered.
The amount that can be carried forward from any tax year to which the taper applied is the balance of the tapered annual allowance. If you do not use your annual allowance entitlement from 2019-20 by 5 April 2023, then this allowance will be lost.
The calculations can appear complex. You must use up your annual allowance for the current tax year first. Any outstanding annual allowance can then be carried forward from 2018-19 onwards (the earliest of the three carry forward years available).
Please be mindful that you must have been in a pension arrangement in an earlier year to have unused annual allowance to carry forward, although you don't need to have contributed to that pension plan.
There remains an excellent opportunity for high earners to make use of the unused allowance from the tax year 2019-20 before it is lost (after 5 April 2023).
The definition of income for the £240,000 figure is ‘adjusted income’ which is total taxable income from all sources including earned income. All pension contributions are included in annual allowance calculations (though the calculations of the amounts to be included differ between defined contribution and defined benefit arrangements).
If adjusted income is more than £240,000, the taper will only take effect if the ‘threshold income’ limit (of £200,000) is also breached. This test is intended to help protect those with spikes in earnings or contributions. If an individual’s net income is less than the £200,000 threshold, then they will not normally be subject to the tapered annual allowance.
Care is needed here, with any new salary sacrifice arrangement (set-up on or after 9 July 2015), which may be included in the calculation. If in doubt, please speak to us for guidance. The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice.
Also, it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
The aspects of pensions are complicated, so seeking advice is essential. To discuss this, or other pension issues in more detail, please contact us.
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.
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.