With the current tax year ending on 5 April 2019, now is the time to consider some pension planning and reliefs that could make a difference to your tax liability for this year and benefit your future retirement planning.
The period between now and 5 April 2019 presents the final opportunity for individuals whose annual allowance of £40,000 has been tapered due to their classification as a ‘high earner’, to look back three years and make use of their un-tapered full £40,000 allowance from the 2015/16 tax year.
All individuals are entitled in any tax year to contribute to a pension scheme up to the cap of their annual allowance, which currently sits at £40,000, without incurring a tax charge; excess contributions are charged at the individual’s marginal rate of tax. You can also utilise any unused annual allowances from the three previous tax years to increase the allowance available for your contribution, provided you were a member of a registered pension scheme in these tax years.
The tapering rules were introduced as at 6 April 2016 (the 2016/17 tax year) and therefore this current tax year, being the 2018/19 tax year, presents the last opportunity to use the un-tapered allowance from the 2015/16 tax year.
An individual has earnt £230,000 for the previous 5 years and they have been a member of a scheme throughout the time, however they have made no contributions. They therefore have available to them:
-The full £40,000 allowance from the 2015/16 Tax Year
-Tapered annual allowances of £10,000 for 2016/17, 2017/18 and 2018/19
The individual can therefore make a gross contribution of £70,000 to a registered pension scheme before the 6 April 2019. This gross contribution will also take the individual’s basic rate tax band (whereby tax is paid at 20%) from 34,500 to £104,500. The higher rate band will also be increased accordingly; this will result in a significant tax saving.
From 6 April 2019, however, this individual will only be able to contribute £40,000 to a Pension Scheme, being four tapered allowances of £10,000.
As shown in the example above, once we reach 6 April 2019 and commence the 2019/20 tax year, high earners will only have four tapered annual allowances available to them, as opposed to utilising the un-tapered allowance from the 2015/16 tax year.
If you have any further questions, would like to understand the quantum of annual allowance you have available to you, or would like to understand the tax benefits of contributing to a pension scheme, please contact our tax team at firstname.lastname@example.org and we will be more than happy to assist you.