Contributions
Pension contributions of up to £60k (the Annual Allowance), a year may be made by an individual and tax relief is available at that individual’s highest tax rate. Here’s an illustration of the savings:
Assuming a contribution into a pension fund of £1000 –
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It costs someone paying tax at the basic rate of 20% effectively £800
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For someone who pays tax at the higher rate of 40% it would cost £600
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To an additional rate taxpayer paying 45% tax, the net cost would be £550
(Different tax rates and savings apply to Scottish taxpayers)
A company (employer) paying into a pension fund can claim Corporation Tax relief on the full contribution amount, for some relief will be at a rate of 25%. This is an attractive option for contractors and entrepreneurs who run their business through a limited company who can reduce the taxable profits of their company whilst adding to their pension pot with help from the taxman. Contractors working under an umbrella employer, such as PayStream’s My Max, can choose to auto-enrol in their employer’s scheme or arrange for contributions to be made into their own personal pension plans.
Restrictions
Although tax relief for pension contributions is widely available to everyone there are some restrictions to be aware of:
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Tax relief is only available to the contributor. An employee will be eligible for relief on their contributions. An employer will be eligible for tax relief on their contributions made directly or on behalf of an employee.
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Pension contributions beyond the Annual Allowance of £60k are subject to a tax charge. However, if the Annual Allowance is not utilised, the unused portion can be claimed in a later year subject to a 3 year limit.
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Tax relief for pension contributions are restricted to the amount of an individual’s Net Relevant Earnings in a year. If the person wants to put £15,000 into their pension fund but has earnings from employment of £10,000 and income from property letting of £20,000 in a year, tax relief would be available only on £10,000.
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Depending upon their historical contribution record they may have some unused Annual Allowance available which could help them to reach their target investment.
Making the right decision as to when, where and how much to invest in pensions is important. Although obtaining tax relief will figure in their thinking, we believe that contractors, entrepreneurs and other business owners should take specialist pension advice from an independent Financial Advisor in helping them to make that decision.