It's that time of the year again and the end of the tax year is looming (5 April 2016)
Pensions remain the most tax efficient way to save for retirement and for most people, the new freedoms have removed any lingering barriers to accessing funds and passing on unused funds on death. With further cuts to funding limits coming in from 6 April 2016, maximising pension funding prior to this tax year end could be highly advantageous.
To ensure you don't miss an opportunity for a top up, we've put together 10 reasons to fund your pension before 6 April.
1. Annual allowance (AA) cut for higher earners
- Some high earners will face a cut in the amount of tax-efficient pension saving they can enjoy from 6 April 2016. The standard £40,000 AA will be reduced by £1 for every £2 of 'income' earned over £150,000 in a tax year, until the allowance drops to £10,000.
- For some people, 2015/16 may be the last opportunity to enjoy the full £40,000 annual allowance.
2. Additional Annual Allowance for 2015/16
- To achieve the full alignment of pension input periods (PIPs) with the tax years from April, the transitional rules for the current tax year could see some people able to pay an additional £40,000 into their pension for the period 9 July 2015 to 5 April 2016.
3. Don't miss the chance for a £50k carry forward
- The maximum carry forward of unused allowances for the current year is £140,000, being £50,000 from each of the 2012/13 and 2013/14 tax years plus £40,000 from 2014/15.
- Next tax year this will drop to £130,000, as another £50,000 drops off the scale, before it settles at £120,000 in 2017/18 - providing there are no further reductions to the annual allowance.
4. Fund and protect above the new £1m Lifetime Allowance (LTA)
- With the lifetime allowance set to fall to £1m in April, it will be necessary to weigh-up the pros and cons of electing for the new ‘fixed protection 2016' to lock into a £1.25m LTA. The downside is that if you opt for fixed protection, you will have to stop paying into pensions after 5 April 2016. So this only leaves a short window to maximise your tax efficient contributions and build a bigger retirement pot to protect.
5. Tax relief at highest rates
- Additional rate and higher rate taxpayers may want to maximise pension contributions now as the Government are currently reviewing the pension tax relief framework and relief at the highest rates may not be around forever.
6. Boost SIPP funds now before accessing flexibility
- Anyone looking to take advantage of the new income flexibility for the first time may want to consider boosting their fund before April, potentially sweeping up this years full £40,000 plus any unused allowance carried forward from the last three tax years.
- This is because once ‘income' has been accessed under the new rules, the annual allowance for money purchase schemes like SIPPs, irrespective of income, will drop to £10,000 and any unused carry forward allowances will be lost forever.
7. Dividend changes and business owners
- Many directors of small and medium sized companies may be facing an increased tax bill next year as a result of how dividends will be taxed. Pension contributions could therefore be the best way of cutting the overall tax bill, while still receiving the same level of benefit.
- In addition, if a director is over 55, they now have full unrestricted access to their pension savings.
8. Recover personal allowances
- For a higher rate taxpayer with taxable income of between £100,000 and £121,200, an individual pension contribution that reduces taxable income to £100,000 would achieve an effective rate of tax relief at 60%. For higher incomes, or larger contributions, the effective rate will fall somewhere between 40% and 60%.
9. Avoid the child benefit tax charge
- Child benefit is worth over £2,500 to a family with three children and is cancelled out by the tax charge if the taxable income of the highest earner exceeds £60,000. There is no tax charge if the highest earner has income of £50,000 or less. As a pension contribution reduces income for this purpose, the tax charge can be avoided.
10. Sacrifice bonus for an employer pension contribution
- March and April are typically the times of year when many companies pay annual bonuses. Sacrificing a bonus for an employer pension contribution before the tax year end can bring several positive outcomes.
- The employer (13.8%) and employee (2%) National Insurance savings could be used to help boost pension funding, giving more in the pension pot for every £1 lost from net income. Taxable income is also reduced, potentially recovering personal allowance or avoiding the child benefit tax charge.