FAQ Regarding Retirement, Pensions?
Christopher Lockerbie- Financial Adviser
1. What is the difference between Personal and Employer pension contributions.
Personal Pension Contributions
If you're a UK basic rate taxpayer, you will get 20% tax relief automatically added by HMRC.
Every £800 paid into your pension you will receive an extra £200 from the government. This is an uplift in your initial premium of 25% before you start investing in the money.
If you're a higher, or additional, rate tax payer, you can reclaim further income tax by completing your annual tax return.
However, there are various rules that affect the amount you can contribute. You will get tax relief on pension contributions of up to 100% of your earnings in the current tax year or a £40,000 gross annual allowance, whichever is lower. We say gross because the £40,000 figure is your contribution + tax relief. Making a total of £40,000 contribution will cost you £32,000 and the government £8,000. This is powerful for your retirement planning.
If you earn £30,000 but put £35,000 into your pension pot, you will only legally receive tax relief on £30,000. Going over the limits would result in an annual allowance tax charge, so it is key to get advice on your contributions.
Carry forward is a very important rule for higher earners that allows you, under certain circumstances, take unused allowances from the previous three years and contribute more than the standard annual allowance. To do this you must have been in a member of a pension scheme during those years.
The current tax year + the previous 3 tax years allowance = £160,000.
If you earn £100,000 and have made £30,000 in pension contributions over the previous 3 years, you are able to contribute the full £100,000 into your pension by utilising the remaining allowance. You would contribute £80,000 and receive £20,000 in 20% rate tax relief, with the higher rate relief available through tax return.
There is an exception to this standard rule. If you have a personal pension, and you start to draw money from the pension, the annual allowance reduces to £4,000 gross.
Since April 2016, the annual allowance is also reduced if you have an income of over £150,000, including pension contributions, meaning higher earners could have a reduced allowance of £10,000 gross for pensions.
Employer Pension Contributions
When your company contributes to your pension, both you and the company can benefit. The main difference is unlike personal contributions, a company can contribute more than you earn, up to the current annual allowance of £40,000.
As mentioned earlier, if you can take advantage of 'carry forward', then it could be even more beneficial.
There are various types of people who benefit from this:
- Business owners & directors- Contributions to an employee's pension can be offset against corporation tax
- Sole traders & partnerships- Contributions to an employee's pension can be offset against their income tax liability
- Employers- Unlike salary, pension contributions are exempt from National Insurance of 13.8%
- Employees- Subject to the employer's approval, employees can save tax and National Insurance by exchanging part of their salary for a pension contribution.
Do you have a question? Email us at email@example.com.
It is important that no actions should be taken without first taking advice. Personal circumstances and an individual’s appetite for risk means that the advice for one person may not be the same for everyone. Reeves do not advise on Defined Benefit pension schemes. Reeves do introduce a third party specialists in areas of work we do not cover. Reeves run an advanced investment portfolio management service on an advisory basis only