Planning for your future or planning for now?
We are all aware that putting money into a pension enables us to save for our future retirement but have you considered the savings that are available now?
Each year, we all have up to £40,000 of annual allowance for pension contributions. If you are an employee, these can be made by you and/or your employer.
If you are not working, you can still make a net contribution of £2,880 (or a grandparent could make a gift), on which your pension pot will receive a refund from the Government of 20%. Making the total contribution £3,600.
Owner/Director – Low Salary
Do you own your own company? Take a small salary and some dividends each year? How about getting your company to make pension contributions?
As a director, your company may not be required to register for Auto Enrolment so there may not be a requirement to make pension contributions but they could still make payments into your personal pension or SIPP. Irrespective of your net relevant earnings, the company could make contributions of up to £40,000 in this tax year. These are fully deductible for corporation tax purposes and are a tax efficient way of releasing funds from the business.
It is important to note that HM Revenue and Customs may question why the pension contributions are higher than your salary.
Individual – High Income
As an individual with income of £110,000 before pension contributions, a review should be undertaken, as your £40,000 annual allowance may be restricted.
Once income, including pension contributions exceeds £150,000, the annual allowance is restricted by £1 for every £2. The maximum reduction of £30,000 will apply to anyone with income, including pension contributions, of £210,000 or more. This means that you would only be able to pay £10,000 in to your pension.
If higher contributions are made, then there is a pensions charge, declarable on your Self Assessment Tax Return, on the excess at 45%. If this tax exceeds £2,000 then you can ask your pension fund to pay the tax on your behalf. You may consider from a commercial standpoint that if your employer is making the contributions, that this is still a benefit, as long as the lifetime allowance is not at risk.
As an employee, one option would be to consider salary sacrifice. This means giving up some of your salary in favour of making a pension contribution. If you would like to discuss this, we can provide some examples. Your employment contract would need to be updated and formal documentation prepared but we can introduce you to an HR firm who can assist.
You may already be paying into your pension scheme by way of salary sacrifice but this still counts towards you contribution limit, so you may be exceeding the £10,000 maximum without realising it.
Unused Allowances
If you have been making pension contributions in earlier years but not using the full allowances available to you, how about making a ‘catch-up’ payment?
Is it possible to make use of unused allowances for the current and prior 3 tax years so 2019/20, 2018/19, 2017/18 and 2016/17.
We would need to review your contribution records to determine whether you have any carry forward from 2016/17. Please note that contributions are allocated against the current year allowances first so contributions in excess of £40,000 or £10,000 (if restricted) may be required to access this earlier year relief.
Subject to further investigations, you could have the following allowances available to use:
- 2016/17 – £10,000 to £40,000
- 2017/18 – £10,000 to £40,000
- 2018/19 – £10,000 to £40,000
- 2019/20 – £10,000 to £40,000
- Total – £40,000 to £160,000
Notes
Net relevant earnings – income from a trade; employment income; taxable redundancy payment and benefits
Auto Enrolment – Employer minimum contribution – 3%
Total minimum contribution – 8%
Lifetime Allowance – £1,055,000 from April 2019
This is just a brief overview of the rules and your own specific position should be reviewed separately.
If you wish to review your pension position, please contact Lucy Orrow on 01376 326266 or lucy.orrow@lambert-chapman.co.uk
Posted by Lucy Orrow
Disclaimer
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.