Under current rules, all pension savers can benefit from tax relief on pension savings of up to £40,000 per year. The annual allowance applies across all of your pension schemes and includes all of the contributions that you, your employer or anyone else pays on your behalf. Any savings over this amount are levied at your usual income tax level.
However, from April 2016, this £40,000 limit will start to be reduced down towards £10,000 for anyone earning between £150,000 and £210,000 per annum.
In terms of other savers, there is a concern that the Chancellor may bring in a flat rate system where all taxpayers receive the same level of pension tax relief regardless of earnings.
We expect all details to be clarified in the Budget on 16 March.
We may also see some changes to the rules that currently allow pension savers to ‘roll over’ any unused pension allowances from the three previous years.
Until 16 March there is likely to be considerable uncertainty over the changes being made to tax relief on pension savings.
Where possible, all pension savers should consider their tax position and seek to make contributions ahead of the Budget announcement on 16 March. For help or advice please do contact us at Clayton & Brewill.
Click here to email Doug Perry or call 0115 950 3044.
The lifetime pension allowance will also reduce in April 2016, from £1.25 million to £1 million – and this will affect all savers, regardless of whether you are a basic rate, higher rate or additional rate taxpayer.
The lifetime allowance is a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – without triggering an extra tax charge.
You can still pay in more than the £1 million to your pension but you will incur hefty tax charges, on top of normal income tax, when you retire. These additional charges are 25% for income you take out of your pension, and 55% on lump sums.
This effectively makes paying into a pension above the lifetime allowance uneconomical.
Whilst most of us won’t have to worry about the reduction in the lifetime allowance, if the value of your pension benefits is approaching, or above, the new £1m level it may be necessary to take your pension early or cease contributions to avoid your benefits exceeding lifetime allowance.
‘Many GPs may be adversely affected by the reduction in the lifetime allowance’, adds Yvonne Jackson, GP accounts specialist at Clayton & Brewill. ‘GPs and anyone else with a substantial pension pot should consider the tax implications of allowing savings to rise about the new £1m lifetime allowance.’