Don’t miss out! The end of the current tax year is almost upon us and time for advisers to make the best of the annual allowance, says Steve Berridge, technical services manager, IFGL Pensions.
Many clients don’t realise that up to £60,000 can currently be paid into a pension during the tax year. In many cases tax relief is also available on these contributions.
UK tax residents can receive tax relief at their marginal rate of income, so if they are an additional tax rate payer, as much as 45% . This £60,000 annual allowance includes the total of all gross personal and employer contributions. Company contributions can also be Corporation tax efficient.
An individual’s annual allowance might be lower than £60,000 if:
• They have earned less than £60,000 in this tax year (in which case their annual allowance will be limited to 100% of their earnings)
• They are a high earner (those with threshold earnings over £200,000 per annum will have their annual allowance reduced by £1 for every £2 of adjusted income to a minimum of £10,000 – this is known as tapered annual allowance)
• They have already started to access a pension flexibly, and have triggered the Money Purchase Annual Allowance (MPAA) of £10,000
• They are a non-earner (but even non-earners can save up to £3,600 gross into pension each year and benefit from basic rate tax relief – a really useful planning tool for spouses and children)
A second potential tax benefit is available for those who are close to or just above one of the tax thresholds, which is an increasing number of folk due to fiscal drag. For example, someone earning £55,000 during the current tax year will pay tax at a rate of 40% on the highest £4,730 of those earnings. However, if they make a £4,730 pension contribution, they will avoid this significant tax deduction and instead benefit from tax relief on the money that is invested in their pension.
Even people who are not UK tax residents can make contributions to a UK pension up to the annual allowance if their circumstances permit and although they may not receive UK tax relief on those contributions, they will still be investing in their future retirement pot.
Another reason to get a contribution in soon, is that people who have not paid their full allowances in previous tax years get the opportunity to carry forward their unused tax relief by up to three years.
So, someone who has not paid any contributions in the previous three tax years could carry forward £40,000 for tax years 2021/22 and 2022/23, plus £60,000 for tax year 2023/24, in addition to the £60,000 available in the current tax year, making a total potential contribution of £200,000.
Some criteria apply when using carry forward relief, for example the individual needs to have been a member of a relevant pension scheme, and crucially must have enough earned income in the current tax year to cover the whole contribution; advisers can add huge value to clients here.
A final reason to think about making a last-ditch contribution this tax year is that the Government has been making changes to pension tax legislation in recent years, so it cannot be guaranteed that £60,000 will be available in coming tax years. In other words, use it or risk losing it!
Finally, it’s worth noting that if you are planning to advise your clients to make contributions within this 2024/25 tax year that you will need to take pension provider cut-off dates into account.
For example, in order for contributions to be credited by 5 April 2025, our own IFGL Pensions deadline to receive a fully completed Contribution Declaration Form by Friday 21 March 2025 and payment must be received in the SIPP Bank Account no later than Friday 4 April 2025. So last minute normally doesn’t mean ‘last day of the tax year’!
By Steve Berridge, technical services manager, IFGL Pensions
