There have been several changes to the tax rules relating to pension contributions. Taxpayers need to be conscious of the amounts they are contributing and deemed to be contributing to pension funds, or they risk facing unexpected tax charges.
RESTRICTIONS ON PENSION ANNUAL ALLOWANCE
Alongside decreasing limits on the value of pension funds, measures have been introduced in recent years to restrict the amount an individual can contribute to their fund in any one tax year. Any taxpayer wishing to maximise pension contributions, and the associated tax relief, has had to contend with a downwardly moving target. Paying more than your annual allowance into your pension fund will result in a tax liability arising.
Many individuals who frequently make pension contributions are aware that the standard annual allowance is a gross figure of £40,000. However, that figure can be significantly reduced for individuals with income in excess of £150,000 and an even greater reduction exists for individuals who have already made certain withdrawals from pension funds. In some circumstances these additional restrictions reduce the annual allowance to £4,000; a fact that can often be overlooked and result in tax charges.
When planning to make contributions to a pension fund, if you have any doubts regarding a potential tax charge please get in touch with your usual Ryecroft Glenton contact.
INCREASED AUTO-ENROLMENT MINIMUM CONTRIBUTIONS.
Auto enrolment is now a major factor in pension planning discussions. The Pensions Regulator has announced that the number of employers meeting their workplace pension duties has reached one million and that statistics show approximately 9.3 million people are saving into a pension.
Minimum auto-enrolment pension contributions will be set at 5% from 6 April 2018 and 8% from 6 April 2019. Employees and directors who already pay sizeable personal pension contributions, independently of their employment income, may inadvertently exceed the annual allowance because of increased auto-enrolment contributions.
HAVE YOU RECEIVED CORRESPENDCE FROM YOUR PENSION FUND ABOUT PENSION INPUTS?
Doctors, judges, NHS directors and a whole host of other well paid public-sector employees may find that a relatively modest increase in salary creates a disproportionally large deemed contribution to their pension fund.
As detailed above, the annual allowance for pension contributions has been reduced in recent years, so it is often the case that a pay rise can result in an individual exceeding their annual allowance and potentially facing a tax charge.
The administrators of pension funds are obliged to notify members when they have breached their annual allowance. However, the rules are typically seen as baffling and the communication from pension administrators can be poor and tempting for recipients to ignore.
It is vital that individuals receiving communications regarding potential excessive pensions ‘inputs’ seek professional advice. The tax team at Ryecroft Glenton are equipped to analyse correspondence from pension administrators and comment on any associated tax liabilities.