Pensions for Partners: important points to be aware of regarding pensions and tax

As Partners are not employees of the firm, there is no legal requirement for them to be enrolled in the firm’s pension scheme. Therefore, Partners are normally left to their own devices in respect of pension planning and the contributions they make.

Partners making pension contributions can benefit from some significant tax breaks, such as:

income tax relief at their highest marginal rate
the benefit of the pension fund growing free of income tax and Capital Gains Tax
25% tax-free cash on renewal of the pension fund
the fact that most pension funds sit outside of the estate for Inheritance Tax.

However, pensions are a complex area of tax, and individuals can easily and unknowingly make decisions or actions that can have adverse tax consequences.

Two particular areas of importance that Partners should be aware of are:

the annual allowance
use of unused annual allowances.

The annual allowance

The amount that you can contribute to a pension and receive tax relief for is known as the annual allowance. For most Partners, the annual allowance is £60,000 (gross). However, for ‘high earners’, the level of income above which your annual allowance starts to reduce is currently £260,000.

If your income is over £260,000, tapering gradually reduces your annual allowance by £1 for every £2 of income, from £60,000 to a minimum of £10,000 (the minimum applies if you have income of £360,000 or more).

When contributions are made above your annual allowance, there will be an income tax clawback on the excess contributions made at your marginal tax rate.

Therefore, it is important to take advice regarding your pension contribution capacity to avoid any unforeseen tax charges in respect of pension contributions made.

It is worth noting that every individual has an annual allowance, so even non-earning family members could contribute to a pension (maximum contribution amount £2,880, net (£3,600 gross) for non-earners).

Unused annual allowances

Where a Partner has not utilised their full annual allowance in the previous three tax years, they are able to carry forward any unused annual allowance and make a catch-up contribution in the current tax year, as long as they held a pension plan in each of the tax years in question.

However, it is important to note that the current year's annual allowance must be fully utilised before any carry forward can be used to increase the contribution.

The carry-forward allocation is utilised on a first-in, first-out basis, with any unused allocation lost if not utilised within the timescale, making it vital that Partners review their pension contributions and allowances to ensure valuable reliefs are not lost.

Next steps

For a more detailed exploration of the pension rules, see our retirement pension tax relief guide and our insight on pension planning for Partners.

Our dedicated Financial Planning team at Crowe UK can assist with all matters related to pensions or other tax-efficient savings vehicles. To discuss this or other pension issues in more detail, please get in touch with your usual Crowe contact.

Video