What limits your pension contributions?
April 6, 2017
There are many favorable tax benefits of saving into a pension including tax relief on contributions, tax efficient growth on the underlying funds and a tax free lump sum on drawing benefits. Furthermore with the introduction of the pension freedom rules in 2015, pensions in general have become increasingly popular.
However, with such new flexibility and favorable tax treatment HMRC have increased restrictions on pensions. Here are some of the restrictions that currently apply on building up pension funds that you should be aware of.
Tax relief on personal pension contributions for a UK relevant individual is restricted to 100% of your relevant UK earnings, capped at the annual allowance (see below). The definition of relevant earnings is quite specific, but even if you have no relevant UK earnings you can contribute up to £2,880 net per annum into a pension and claim basic rate tax relief.
The annual allowance limits the amount of pension savings that can be made each year, upon which tax relief can be claimed. This includes personal contributions and contributions made by anyone else into a pension, such as a corporate entity.
The annual allowance for this tax year (2016/17) is £40,000 gross per annum, down from the highest level of £255,000 in 2010/11. Any excess contributions over the annual allowance would be subject to a tax charge at your marginal rate. Further restrictions have also been introduced for high earners with income above £110,000, which could reduce the annual allowance for those individuals even further.
Carry Forward Relief
Carry forward allows you to utilise unused annual allowances from the previous three tax years. You must have been a member of a registered pension scheme in the three previous tax years in order to qualify for carry forward, but this could increase the maximum contribution in one year to as much as £160,000.
Money Purchase Annual Allowance
In light of the favorable tax treatment for corporate entities on pensions, HMRC have reduced the annual allowance further where individuals have already accessed their pension benefits. This is known as the Money Purchase Annual Allowance (MPAA) and it reduces the scope for your contributions down to £4,000 per annum for some individuals.
The limit on the amount of pension benefit that can be drawn from pension schemes, known as the Lifetime Allowance, is currently £1,000,000 for 2016/17. This reduced from £1,250,000 in April 2016.
Investors with large pension funds may be affected by these changes, but there are some ‘protections’ available that these individuals may be eligible for.
In summary, the increased restrictions and many interrelated factors can make pension contributions a complex area to consider.
Please contact our Financial Planning Department for further details or a full review of your situation and the options available.
Please note that the information provided in this article is in no way intended as advice and is provided for information purposes only. You should seek formal advice before taking any action in respect of your pension fund.