Who is protecting your future – part 4
How much can I invest in a pension
In this series of articles, we will try to explain your options and clear some of the minefields for you.
We are not pension advisors – we are accountants. We do not sell pensions and have no vested interest, other than helping our clients protect themselves financially.
Having given a brief introduction, last week we stopped to warn about some of the pension scams on investors. Hopefully, you will take care and not get caught out.
This week we will look at how much you can pay into a pension.
Depending on the sort of scheme and your business you can make pension contributions at regular or ad hoc intervals including, monthly and annually. And you can “top up” your payments from time to time.
Very broadly, you can pay from £3,600 to £40,000 every year into your pension or pensions. But there are restrictions and tax reliefs that you need to be aware of before you decide how much to pay. You or your employer can usually pay up to £40,000 every year into your pension, but there are limits to how much tax relief you can receive.
As we have said before, a pension is a tax efficient savings scheme. You receive tax relief on your contributions as you pay into your pension and your savings have the possibility of growing with minimal tax.
The actual amount you can pay in a tax year for tax relief purposes is the greater of:
- A gross contribution of £3,600 or:
- 100% of your earnings, subject to the annual allowance
The current annual allowance for most people is capped at £40,000. That is the amount you can contribute and still get tax relief on. (Earnings for these purposes is as defined in pensions legislation and e.g. does not include dividends.)
Example:
In very broad terms, if you are a higher rate (40%) taxpayer who hasn’t made any other pension contributions in the tax year you can pay £32,000 into a pension fund. You get basic rate tax relief on it – so you would be due a tax refund of £32,000 at 20%, AND HMRC contribute a further £8,000 into your fund. So you build up a pension fund by £40,000 for a cost of a net of tax amount of £24,000.
The annual allowance is currently capped at £40,000 although a lower limit of £4,000 may apply if you have already started drawing a pension. The annual allowance applies across all of the schemes you belong to. It is not a ‘per scheme’ limit and includes all of the contributions that you or your employer pays on your behalf.
If you exceed the annual allowance in a year, you won’t receive tax relief on any contributions you paid that exceed the limit and you will be faced with an annual allowance charge, which is added to the rest of your taxable income. If you haven’t made contributions in the three previous tax years, you should be able to use any unused annual allowance to reduce that charge.
And then for very high earners, there is now a Tapered Annual Allowance. Given that the Government want and need you to save for your retirement that is not very helpful. Broadly, for every £2 of income above £150,000, £1 of the annual allowance is “lost”, up to a maximum of £30,000. So that the allowance is capped at £10,000 for anyone earning over £210,000.
As you can see this is not straightforward at all. And certainly, as you come towards the 05 April tax year end you should consider your position carefully, think about making savings and how best to invest tax efficiently.
For further advice existing clients email us at support@anytime.uk.com or call 03333 110 230
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Related Blog
Who is protecting your future – part 3
Pensions – is your money safe and secure? In this series of articles, we will try to explain your options and clear some of the minefields for you. We are not pension advisors – we are accountants. We do not sell pensions and have no vested interest, other than helping our clients protect themselves financially. — Read more
