Pension contributions – Understanding the opportunities & rules

There are many opportunities for pension planning but the rules can be complicated

The rules include a single lifetime limit of £1.5 million on the amount of pension saving that can benefit from tax relief as well as an annual limit of £50,000 on the maximum level of pension contributions. The annual limit includes employer pension contributions as well as contributions by the individual. Any contributions in excess of the annual limit are taxable on the individual.

Tax relief is currently available on pension contributions at the taxpayer’s marginal rate of tax. Therefore a higher rate taxpayer can pay £100 into a pension scheme at a cost of £60. An additional rate taxpayer can pay £100 in at a cost of only £50. Indeed for some individuals, due to the complexity of the tax system, the effective relief may actually exceed 50%.

As it is widely acknowledged that governments generally are unable to provide adequate levels of retirement pensions, it is more important than ever to provide for a secure old age. All individuals, including children, can obtain tax relief on personal pension contributions of £3,600 (gross) annually without any reference to earnings. Higher amounts may be paid based on net relevant earnings (NRE). There is no facility to carry contributions back to the previous tax year.

Directors of family companies should, as an alternative, consider the advantage of setting up a company pension scheme or arrange for the company to make employer pension contributions. If a spouse is employed by the company consider including them in the scheme or arranging for the company to make reasonable contributions on their behalf.

Changes Ahead

It has been announced that from 2014/15 the standard lifetime allowance of £1.5 million will be reduced to £1.25 million and the annual allowance of £50,000 will be reduced to £40,000.

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