Are you making the most of pensions tax reliefs?

Published on 10th December 2018

Experts have recently warned that thousands of over-55s are at risk of incurring charges and reducing the available tax relief if they continue to delve into their pension pots whilst benefiting from workplace pension contributions. This article takes a look at some key pensions tax reliefs and allowances.

Relief on pension contributions

All pension schemes, whether they are workplace schemes or personal pension schemes, must be registered with HMRC. Money purchase pension schemes allow the saver to receive tax relief on contributions into the scheme, with tax-free growth of the fund. No tax charge is typically payable if the employer contributes into the scheme on the employee’s behalf and the employer will obtain a deduction from their taxable profits.

Pension savers can make contributions and receive tax relief on 100% of earnings in any given tax year, though this is typically restricted for contributions above the annual allowance.

Pensions annual allowance

The pensions annual allowance sets a limit on contributions eligible for tax relief. Currently set at £40,000, any contribution above the allowance may be taxed as the top portion of income. In addition, where total pension savings exceed the £1,030,000 lifetime allowance at retirement, and fixed/primary/enhanced protection is not available, a tax charge arises.

Tapered annual allowance for some

In April 2016, the government introduced a taper in order to restrict the amount of annual allowance available for pension savers with ‘adjusted annual incomes’ (an individual’s net income and pension contributions made by their employer) over £150,000. A saver’s annual allowance is reduced by £1 for every £2 of adjusted income  over £150,000, down to a minimum of £10,000.

Money Purchase Annual Allowance (MPAA)

The government is alive to the possibility of people taking advantage of pension flexibilities by ‘recycling’ their earned income into pensions and immediately withdrawing amounts from their pension funds. The MPAA, when triggered, reduces the tax-relieved saving allowance to £4,000 per annum.

The rules on triggering MPAA are complex – for information on this, or on a range of tax-efficient personal planning strategies, please contact us on 01392 211233.