Pensions  

Making the most of current tax allowances to help your client

This article is part of
Guide to year-end tax planning

Making the most of current tax allowances to help your client

Every year, as the chancellor gears up to deliver the annual Budget speech, the rumour mill goes into overdrive as to whether pensions, and the tax reliefs that they enjoy, will be in the firing line.

This year is no different as newly appointed chancellor, Rishi Sunak, has been under pressure to drop any plans to cut pensions tax relief for higher earners.

“While we wouldn’t suggest that people act purely out of fear of changes - for example, by withdrawing pension funds that they don’t need - there’s generally no harm in making the most of reliefs and allowances, such as contribution tax relief and the annual allowance, as the rules currently stand,” says Jessica List, pension technical manager at Curtis Banks.

Key Points

  • Speculation is mounting again about pension tax
  • Now is a good time to make use of the annual allowance
  • Clients can use unused annual allowance from previous years

“We know that if there are changes, they will likely be further restrictions, so if clients are in a position to boost their savings and take advantage now then it’s worth considering doing so.”

With only a week to go before the Budget speech, what should advisers be doing to make the best use of their client’s pension as the end of the 2018-19 tax year approaches?

Tapered or not – make the most of the annual allowance

Fiona Tait, technical director at Intelligent Pensions, explains: “The key factor in tax year-end planning for clients is to ensure they make maximum use of their annual tax allowances, and for many people pensions are the most tax-efficient investment available.

“The majority of people will be subject to the standard annual allowance of £40,000, which means that the income tax that would otherwise be due to pay on their earnings is instead invested in their own pension. More savings, less tax – a win, win situation.”

However, for some, the annual allowance is restricted by the tapered annual allowance or money purchase annual allowance.

Annual Allowance 
Tax yearAmount
2018 to 2019£40,000
2017 to 2018£40,000
2016 to 2017£40,000
2015 to 2016April 6 2015 to July 8 2015 – £80,000 July 9 2015 to April 5 2016 – £0
2014 to 2015£40,000
2013 to 2014£50,000
2012 to 2013£50,000
2011 to 2012£50,000
Source: HMRC

“Clients are increasingly subject to tapering of the annual allowance,” says David Wright, consultant at Mattioli Woods.

“A personal pension contribution could reduce the client’s ‘threshold income’ below £110,000, allowing the full £40,000 allowance to be reclaimed.

“If not planned for properly, however, the reduction in the annual allowance can lead to insufficient financial resources being put into later life income and potential tax efficiencies not being fully used.”

He adds that, as a result, it is important to look at pension alternatives where this is the case and suggests that, for many clients, the answer to this will be Isa contributions, where the annual allowance of £20,000 is not already being used.

“While Isas do not confer tax relief on contributions, the tax-privileged nature of investment returns and the absence of tax on withdrawals can make them a clear pension alternative,” Mr Wright says.

“The lack of a minimum withdrawal age applying to an Isa can also make them suitable savings vehicles over a shorter-time horizon.”