With the January self assessment deadline passing, it is now time to turn our attention towards tax planning for the remainder of the tax year, and indeed for tax years ahead.

Pension contributions

The maximum contribution to a pension fund that an individual can obtain tax relief for in any one tax year is 100% of their earnings for that year, providing the taxpayer is under 75.
Anybody can pay up to £3,600 (£2,880 with the government top up) per year into a pension scheme regardless of the level of their earnings. This is to encourage individuals on modest incomes to make provision for their retirement.

Contributions can be made by the scheme member, a third party on the member’s behalf (such as a parent on behalf of a child) or by an employer or former employer.

If you are a director of a limited company, your company can also contribute on behalf of you, however the relief will be received by setting the expense against company profits, thus reducing any Corporation Tax payable.

Tax relief for pension contributions

What makes pension schemes so popular is that a taxpayer will receive relief every time a contribution is made. Tax relief on pension contributions is received by either ‘relief at source’ or under a ‘net pay arrangement’.

Through the relief at source method, payments are made net of 20% tax, meaning that if you wanted to make a contribution of £1,000 to your pension scheme, you would only have to actually pay in £800, with the government contributing the remaining £200 (£800 x 100/80).

If you are paying tax at higher rate or even additional rate, the basic rate and higher rate bands are increased, meaning that you will pay more tax at the lower rates.

Where contributions are made to a personal pension scheme, the relief at source method always applies.

Contributions to Occupational Pension schemes (those set up by employers) are generally made under net pay arrangements. Relief via this method is obtained by only subjecting the employers Net pay (Gross salary less pension contributions) to PAYE. This means the more an employee pays as a pension contribution, the less pay will be subject to PAYE.

Scottish Taxpayers

Since 18/19, there has been a tax rate of 19% before the basic rate of 20% which applies to non savings income. If a Scottish taxpayer is paying 19%, they will still receive the full 20% relief.
Scottish taxpayers are also more likely to have to extend the basic rate band earlier than the rest of the UK, due to the 21% tax band when income exceeds £25,688. In this instance, it may be beneficial to file a tax return.

Employer Contributions

If an employer makes a contribution to a members scheme, this is a tax free benefit (ie this does not need to be reported on a P11d), however the member won’t receive any additional tax relief on this amount. It will be the employer who will claim the expense against their company profits, thus reducing Corporation Tax (which could mean a deduction of up to 26.5% if your profits are in the marginal zone).

It’s worth noting that if a pension contribution is made to an employee’s family members pension scheme, this will be deductible for Corporation Tax purposes, however the payment will be subject to Tax and NI, and will be reportable via a P11d.

Annual allowance Tapering/Charges

If contributions exceed the annual allowance for the tax year, a charge to tax will arise on the excess. Most people’s annual allowance is the lower of £40,000 or their relevant earnings for that year, however if you expect your income to exceed £240,000 for the year, it is important to get in touch with us before you make any pension contributions to ensure that we can calculate if you will be liable to any further tax charges.

Lifetime allowances

Where pension funds have been built up and the capital value exceeds the lifetime allowance, a tax charge will be levied on the excess. This is called a ‘lifetime allowance charge’. The lifetime allowance for 2023/24 is £1,073,100.

The rate of tax depends on the method chosen to receive the excess. Taking the excess of this amount as a lump sum will result in a 55% tax charge, whereas leaving the excess in the fund will result in a 25% tax charge.

In the case of the latter, a further charge is likely to arise when the cash is withdrawn from the fund, as pensions are taxed at the normal rates on withdrawal.

The future of tax relief on pensions

Despite nothing being mentioned in the Autumn statement, the cost to the government of the tax relief for pension & Income Tax/NIC’s is up £4.2 billion to £67.3 billion. The complete omission of this from the Autumn statement has led some industry experts to believe that there may be a cap on the relief on pension savings in the March 2023 finance bill.

From 1st August 2022, there was a new type of employee retirement provision introduced in the UK called a Collective Defined Contribution. Once approval is received from the Pensions regulator for an employer to use this scheme, the idea is rather than contributing to your individual pot, employers and employees contribute to a collective fund, with fixed contributions by the employer. To be cost effective, these schemes are only likely to appeal to large employers.

Expected pension levels are predicted to be higher with this new scheme due to the fact that all scheme assets are invested collectively – there are no individual ‘pots’. When members retire, they are paid a pension from scheme assets. Pension costs are fixed, so employers pension budgets will not need to vary year on year, and the mortality risk in these schemes is spread among members (as opposed to being borne by each individual member, as is the case under a normal Defined Contribution scheme).

The freezing of the Personal Allowance the Basic rate band until April 2028 means that each year, there will be more and more people paying tax at Higher rate and Additional rate. This, coupled with the Additional rate threshold reducing to £125,140, means that taxpayers should consider deferring any contributions until 2023/24 if a contribution would dip you under the threshold again.