TaxApr 3 2023

Tips for year-end pension tax planning

  • Describe the basic year-end tax planning relating to pensions
  • Explain allowances
  • Describe the situation with child benefit
  • Describe the basic year-end tax planning relating to pensions
  • Explain allowances
  • Describe the situation with child benefit
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CPD
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Tips for year-end pension tax planning
With the freezing of various tax allowances this April, many employees may unwittingly find themselves dragged into a higher tax bracket. (FT Money)
As this is effectively ‘free money’ for the employee, we encourage individuals to investigate what their employer offers.

Note that this allowance is reduced where the individual has either flexibly accessed their pension – in which case the allowance reduces to £4,000 a year (£10,000 from April 6 2023) – or is classed a high earner.

A high earner for these purposes is defined as someone with ‘threshold income’ – broadly, taxable income excluding pension contributions – of more than £200,000 and who has an ‘adjusted income’ – broadly, taxable income including pension contributions – above £240,000 (£260,000 from April 6 2023). 

For those affected, the annual allowance is reduced by £1 for every £2 by which the adjusted income limit is exceeded, down to a minimum of £4,000 (£10,000 from April 6 2023). 

Consequently, an individual with adjusted income of £312,000 or more will only have a £4,000 allowance for the current tax year. For the 2023-24 tax year onwards the point at which the AA will be reduced to the new £10,000 minimum becomes £360,000.

Carry forward allowances

The pensions rules allow unused annual allowances to be carried forward up to a maximum of three tax years. 

As such, an individual who has not paid into their pension in the past three tax years could be able to contribute as much as £160,000 in the fourth year. With the AA increasing to £60,000 from April 6, the maximum amount will grow to £240,000 by April 6 2026.

However, a key point to note is that for an individual to be able to carry forward unused pensions allowances they must be a member of a registered pension scheme at some point during the tax year in question. 

It is possible to advise clients who cannot afford to make large contributions to at least set up a self-invested personal pension with a more modest amount to start accruing unused annual allowances that can be used in future.

The LTA

In addition to the annual allowance, the current pension rules include a further cap: the LTA. This is a limit on the amount that an individual can accrue in their pension in their lifetime without incurring a tax charge. 

At various points – the ‘benefit crystallisation events’ – the value of the pension is compared to the LTA and if it exceeds the threshold the individual is subject to a tax charge on the excess. The rate of tax payable is 55 per cent if the amount is taken as a lump sum and 25 per cent if taken as income.

I expect we will see a marked increase in pension contributions next year.
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