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.

Three particular areas of importance that partners should be aware of are:

• the annual allowance
• use of unused annual allowances
• the lifetime allowance.

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 £40,000 (gross). 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).

When contributions are made above your annual allowance there will be a tax claw back on the excess contributions made.

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 annual allowance must be fully used before any carry forward can be used to increase the contribution.

The carry forward allocation is also 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.

Lifetime allowance

As well as an annual allowance, pensions are also subject to a lifetime allowance. Where an individual’s pension pot exceeds the lifetime allowance (currently £1,073,100) there will be a tax charge in respect of the excess amount accrued, which can be subject to tax at up to 55%.

It is therefore important for people with pensions to continually review the value of their pot in relation to the lifetime allowance and take appropriate action where required, for instance ceasing pension contributions if the lifetime allowance is expected to be breached.

Next steps

For a more detailed exploration of the pension rules, please have a read of our previous insights: Pension contributions: act now to maximise tax efficiency and Pension contribution opportunities for Partners.

Our dedicated Financial Planning team at Crowe 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 contact us.