Year end: Make the most of your pension allowances!

The end of the tax year is fast approaching, so now is a good time to consider what you are doing with your investments and the best place to put your money.

Pensions remain the most tax efficient way to save for your retirement. Here is a list of 10 reasons why we think you should pay into your pension before April!

1. Tax relief at the highest rates

  • Tax relief at the highest rates may not be around forever.
  • Additional and higher rate taxpayers should contribute to maximise tax relief at 45%, 40% or even 60% while they have the opportunity.
  • Carry forward can allow contributions in excess of the current annual allowance.

2. Avoid the annual allowance cut for higher earners by using carry forward

  • High earners face a cut in the amount of tax-efficient pension saving they can enjoy this tax year. The standard £40,000 annual allowance could drop to £10,000.
  • It is possible to reinstate their full £40,000 allowance by making use of carry forward.

3. Last chance for a £50k carry forward

  • This tax year is the last opportunity to carry forward unused annual allowance from 2013/14 when it was still £50,000. If it isn’t used, the additional allowance will be lost.
  • The maximum carry forward of unused allowances for the current year is £130,000.

4. Boost SIPP funds now before accessing flexibility

  • Anyone looking to take advantage of the new income flexibility for the first time should consider boosting their pension fund before April, potentially sweeping up the full £40,000 from this year plus any unused allowance carried forward from the last three years.
  • Once pensions are accessed, the Money Purchase Annual Allowance (MPAA) will mean the opportunity to continue funding will be restricted. The MPAA is currently £10k but is set to fall to £4k a year in April – with no carry forward.

5. Recover personal allowances

  • Pension contributions reduce an individual’s taxable income.
  • For a higher rate taxpayer ,with taxable income of between £100,000 and £122,000, a personal contribution that reduces taxable income to £100,000 would achieve an effective rate of tax relief at 60%.
  • For higher incomes, or larger contributions, the effective rate will fall somewhere between 40% and 60%.

6. Avoid the child benefit tax charge

  • A pension contribution can preserve the value of child benefit, rather than being lost to the child benefit tax charge.
  • The child benefit, worth over £2,500 to a family with three children, is cancelled out by the tax charge if the taxable income of the highest earner exceeds £60,000. There’s no tax charge if the highest earner has income of £50,000 or less. A pension contribution reduces ‘income’ for this purpose, the tax charge can be avoided.
  • The combination of higher rate tax relief on the contribution plus the child benefit tax charge saved, can lead to effective rates of tax relief as high as 65% for a family with three children.

 7. Sacrifice bonus for an employer pension contribution

  • Sacrificing a bonus for an employer pension contribution before the tax year end can bring several positive outcomes.
  • The employer and employee NI savings could also boost pension funding.

8. Providing for loved ones

  • The new death benefit rules make pensions extremely tax efficient for passing on wealth to family members – typically no IHT payable and free of tax for deaths before age 75.
  • You may want to consider moving savings which would otherwise be subject to IHT into your pension to shelter them from IHT and benefit from tax free investment returns.

9. Dividend changes and business owners 

  • Directors of small and medium sized companies could be facing an increased tax bill following changes to the taxation of dividends.
  • A pension contribution could be the best way of cutting their overall tax bill.
  • If the director is over 55 they now have full unrestricted access to their pension savings.
  • There’s no NI on an employer pension contributions and they are an allowable deduction against corporation tax.
  • By making an employer pension contribution, this ensures that the tax that would have otherwise gone to HMRC boosts the director’s retirement savings.

 10. Pay employer contributions before corporation tax relief drops

  • Corporation tax rates are set to fall from 20% to 19% from the financial year starting April 2017 with a further planned cut to 17% to effect from April 2020.
  • Companies may want to consider bringing forward pension funding plans to benefit from tax relief at the higher rate.

Don’t delay and don’t lose out. Call the pensions experts at Innes Reid on 01244 347583 or email

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