Pensions tax year end planning, a reminder of the key points

1. All contributions are limited to the annual allowance.  This includes employer contributions, person contributions and third-party contributions. The latter count towards the recipient’s annual allowance.  The standard annual allowance is £60,000. The annual allowance is lower for high earners subject to tapering (£10,0000 - £60,000) and for those who have flexibly accessed their pensions and triggered the money purchase annual allowance MPAA, which is £10,000.

2. Any unused annual allowances from the three previous tax years can be carried forward and added to the annual allowance in the current tax year.  The maximum contribution that can be made in the current tax year is therefore £200,000.  This is made up of a £60,000 allowance for this year, a possible £60,000 of carry forward from 2023/24 and £40,000 from 2021/22 and 2022/23.   Those subject to tapering can benefit from carry forward. The carry forward amount will depend on their contributions and income position in each of the previous tax years.  Those subject to the MPAA can not use carry forward to increase their £10,000 allowance to defined contributions schemes.

2024/25 is the last opportunity to use any carry forward available from 2021/22.  If it not used in the current tax year, it will be lost.

3. Tax relief on personal contributions is limited to the higher of 100% of relevant UK earnings in the tax year the contribution is paid or £3,600.   For those making personal contributions only, carry forward is of no use where their relevant earnings do not exceed £60,000. 

It is not possible to carry forward unused earnings from a previous year. If, for example, an individual has unused allowances of £90,000 and earnings of £30,000 the maximum tax relievable personal contribution is limited to £30,000.

4. Higher and additional rate tax relief on personal contributions is only available to the extent that the client would otherwise have paid tax.  For example, a client earning £60,270 could only benefit from higher rate relief on contributions of up to £10,000.  Any further contributions (up to a total £60,270) will benefit from basic rate tax.

5.  All forms of personal contributions will reduce the individual’s adjusted net income.  This is the income figure used to determine things such as the loss of the personal allowance and the high income child benefit charge.

A contribution to a net pay scheme will reduce the client’s net income.  A contribution to a relief at source scheme is one of the specific deductions in the adjusted net income calculation. 

Although salary sacrifice is technically an employer contribution, it will also reduce the client’s net income and so their adjusted net income.

6. The taxable element of redundancy payments count as relevant UK earnings.  Where employers offer redundancy sacrifice arrangements there is no issue with the earnings limits as the contributions are then employer contributions.

7.  Employer contributions are not limited to the employee’s level of earnings.  For the employer to obtain tax relief on the contributions they need to meet the “wholly and exclusively" rules.  Employer contributions are limited to the annual allowance but carry forward is available.

8.  Any contributions in excess of the annual allowance will be subject to an annual allowance charge on the individual.  The excess is added to the client’s other income and taxed at their marginal rates of income tax. 

Examples

Emma earns £40,000 a year.  She receives an employer contribution of £4,000.  She can pay and receive tax relief on personal contributions of up to £40,000 in the tax year.  The total contributions are £44,000 and so within the annual allowance.

Silvia earns £70,000 a year.  Her employer makes contributions of £5,000.  If Siliva has no carry forward she can pay contributions of up to £55,000.  The total contribution is then within the £60,000 annual allowance.  If she has at least £15,000 of carry forward available she could pay contributions of £70,000.  The total contributions would be £75,000 which would be within the £60,000 plus £15,000 carry forward.

Brendan earns £50,000 a year and is being made redundant at the end of the tax year.  His redundancy payment is £70,000 of which £30,000 is tax free.  The company has offered to pay the £40,000 taxable element of the redundancy as an employer contribution and Brandan agrees.  Brendan has £20,000 of carry forward available.  In addition to his redundancy sacrifice he can pay £40,000 of personal contributions.  The total contributions are £80,000 and so within his £60,000 annual allowance plus £20,000 carry forward.  The personal contributions of £40,000 are less than his relevant earnings so he can benefit from income tax relief.

Hannah owns and runs a limited company.  She has a salary of £10,000 and receives dividends of £30,000.  The company has had a very successful year.  If Hannah has no carry forward available the company can pay up to £60,000 as an employer contribution. If Hannah had for example, £40,000 of carry forward available the company can pay contributions of up to £100,000.  The contributions can benefit from corporation tax relief as long as they meet the “wholly and exclusively” rules.