Making the most of your allowances
In last year’s Budget, there was no change to the personal pension allowance, which is good news for people saving for their retirement. The allowance turbo-charges your pension savings, because, if you are basic rate taxpayer, for every £100 that you pay into your pension pot, HMRC will add £25 and the same again through tax return if you are a higher rate tax payer. This is up to your personal allowance of £40,000 gross in any one year.
If you didn't take advantage of your full allowance in previous years, you can add any unused allowance – going back three years – to this year’s allowance. In other words, someone who hasn’t paid in anything this year or the previous three could pay in up to £128,000 net, which would get tax relief of £32,000 at the basic rate, or £64,000 for a higher rate tax payer, half of which is claimed back in the tax return.(*) It is important to point out that to make these levels of personal contribution you need the salary to cover it in the year the contributions are made. On employer contribution the salary level is not relevant but the same limits are used overall (£40,000 per year; £160,000 including 'carry forward').
This is an extremely useful option for company directors or others who haven’t been funding pensions but have built up large amounts of cash. It can also be useful for people who have downsized their home and have cash proceeds to invest or for people who have a redundancy payment or an inheritance. Even people who’re not working are allowed to pay £3,600 into their pension pots, which brings another £720 from the taxman, so a couple can get £1,440 simply by moving money form one pot to another.
There is also lifetime allowance, the total maximum amount that you can have in your pension fund and enjoy the tax benefits. This was raised in the Budget from £1,030,000 to £1,055,000. This only affects a small number of people, but, if you’re one of them, you should be aware of it, because if you go over the limit you’ll pay tax on it.
A third allowance to bear in mind is that for ISAs. The individual limit is £20,000 or £40,000 for a couple. Any income earned in the ISA is free of tax. Building up an ISA could contribute to your tax free income in retirement.
Nor should you forget your personal income tax allowance. If you’re retired you should optimise the income you can take from your pension. There may be people who haven’t taken money from their pensions because they don’t need it but they should still make the most of their personal income tax allowance which is currently £11,850 a year.
Shrewd savers make their cash work hard for them, they sweat their assets. One of the easiest ways to do this is through careful tax planning and, with the end of the tax year approaching, you should be thinking about this now. So, be sure to get in touch with your Reeves client account manager before the end of the tax year. We have a hotlist of people we’re contacting to make sure they make the best use of their allowances. Speak to your account manager to ensure you’re included.
(*) Please note: Your personal pension provider adds the tax relief onto your pension contributions on your behalf. Depending on the provider, the time frame to add the relief can vary from immediate relief up to 2 months from the initial contribution.
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. The information in this blog or any response to comments should not be regarded as financial advice. Reeves do not advise on Defined Benefit pension schemes. Reeves do introduce a third party specialists in areas of work we do not cover.