For tax years 2010-11 and 2011-12 the tax deductible lifetime allowance limit has been reduced to £1.8 million, and this will be reduced further in 2012-13, to £1.5 million. This is a lifetime contribution figure that is quite unattainable for most taxpayers, but more importantly, from 6 April 2011 the maximum annual tax deductible pension contribution limit has been reduced to £50,000 (down from £255,000 in 2010-11). However the good news is that investors will benefit from tax relief at their highest marginal rate. That is, a basic rate taxpayer will receive 20% tax relief, a higher rate taxpayer 40% and a 50% taxpayer 50% relief.
High earners in the UK are being urged to maximise pension contributions before the 50% tax relief disappears following Chancellor George Osborne’s earlier announcement that the rate is temporary.
Currently, people receive tax relief on their pension contributions at their marginal rate. High earners who pay income tax at 50% could make a £50,000 contribution at a net cost to them of only £25,000. If the 50% tax rate was abolished a £50,000 contribution would cost £30,000, an increase in cost of £5,000.
For higher rate owner managed company directors, if pension premiums are paid via their company they should benefit from a similar saving by virtue of dividends being lower.
If income is caught by IR35, or there is a risk it may be, then its better to pay premiums via the company as you get them set off against the IR35 deemed salary.
Many higher rate earners combine regular investment in a pension plan with regular investments in other savings schemes such as a ISA or Unit Trust; ISAs in particular have particular tax advantages and a high annual investment limit.
Contributions to non-pension savings schemes are not tax deductible.
Expert advice from an Independent Financial Advisor (IFA) is needed on pension and retirement investment planning.
Below is an example of a maximised pension arrangement:
Say you have a salary from your own company of £10k p.a., this means the maximum permissable gross personal contribution would be £10k. Your personal contributions will receive 20% tax relief at source, so the actual payments will amount to £8k. If you are a higher rate tax payer, further tax relief will be given via your self assessment return.
To top this up to the cap of £50k, your employer (in most cases this will be your own company) may claim tax relief on £40k, making £50k altogether
The company will pay its contributions gross, and 20% tax relief is given via a reduction in corporation tax, so £8k ct saving in the company. Any “excess” payments made by the company will be added back on the corporation tax computation.
It is most important, when you send us your year end accounting records for us to prepare the annual accounts, that you inform us of your personal pension contributions in the preceding year at the same time, so we can make due consideration in our tax computations.