Day 4 – Essential Year End Tax Planning – Pension Planning 12/13
In this week’s blog series our Tax and Wealth Management specialists will be discussing essential tax and financial planning tips which should be considered prior to the end of the tax year on 5th April 2013. In the fourth in a series of five blogs, Dave Gleeson talks about Pension Planning for 2012/13.
Pension Provision 2012/13
The annual allowance for total pension contributions paid by both the individual and their employer, upon which tax relief may be claimed is £50,000 for the current tax year.
However, an individual’s personal contributions will be restricted to 100% of their earnings, if this is lower than the annual allowance (earnings excludes any investment or dividend income). An employer contribution can be made up to the annual allowance, irrespective of the employee’s earnings, and the employer can claim corporation tax relief, if the contribution is ‘wholly and exclusively for the benefit of the business’.
Each individual has a ‘pension input period’ which is not necessarily the same as the tax year. You must therefore be careful if your contributions are close to £50,000, so that you do not exceed the annual allowance purely as a result of making the payment at the wrong time.
If you already have a pension arrangement (even if you have not paid into it for years) you can carry forward any unused annual allowances from the preceding three tax years, and depending on your ‘pension input period’, it may be possible to use the next tax year’s annual allowance now. It is therefore potentially possible to pay up to £250,000 this year and claim tax relief.
Whilst it is possible to pay significant contributions you should also be aware that each individual has a lifetime allowance as well as the annual allowance.
The lifetime allowance is simply the maximum value you can accumulate within all pension arrangements without any excess tax charges. The lifetime allowance is currently £1.5 million.
Your pension arrangements can exceed the lifetime allowance, however any excess will be liable to a tax charge, currently set at 55%. This tax is only levied on the excess above the lifetime allowance when the pension benefits are drawn i.e. when you take benefits, on death, or when you reach your 75th birthday (whichever is the earliest).
If you are looking to pay large pension contributions this year (or over a number of years) you need to take care that you do not accumulate pension funds in excess of the lifetime allowance and end up paying tax at 55%.
The final point to consider is that the Chancellor has announced a reduction to both the annual allowance and lifetime allowance from 6 April 2014. The annual allowance will reduce the maximum contributions to £40,000 and the lifetime allowance to £1.25 million.
This is an extract from our Essential End of Tax Year Planning Guide 2012/13