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One of the questions that we are often asked is how much can I invest tax-free in a pension scheme each year?
As a result, we thought that it would be useful to give an overview.
Private pension contributions are tax-free up to certain limits which for the current tax year are:
It is important to recognise in this context that earnings are the total taxable income of an individual including dividends, property and investment income.
The contributions can be made into most private pension schemes such as:
The annual allowance applies across all of the schemes into which contributions are made rather than being a per scheme limit. In addition, this figure is for all the contributions made by the individual, their employer or any third party.
However, it is possible to carry back any unused annual allowance from the previous three tax years provided that the individual was a member of a registered pension scheme in those years.
The annual allowance for the 2014-15 tax year was £40,000, for the 2013-14 tax year was £50,000 and for the 2012-13 tax year was £50,000.
There is nothing to prevent contributions above the limits but any additional sums will be taxed as part of the Self-Assessment tax return.
On the other hand, as it stands, tax relief is available on private pension contributions up to 100% of your annual earnings and, therefore, on contributions above the annual allowance. The amount of tax relief is based on the tax band of the individual.
There has been much speculation that this tax relief could be reduced as part of the upcoming Budget and we will include the details of any such change in our Budget Briefing.
If the tax due is more than £2,000, which equates to an additional payment of £5,000 by a tax payer in the Higher Rate tax band, this tax can be paid directly by the pension provider to HMRC from the pension pot.
Similarly, with the lifetime allowance, tax becomes payable once the threshold of £1.25 million is exceeded. For this, it is important to understand the difference between pension schemes.
Personal, stakeholder and most workplace schemes are designated as ‘Defined Contribution’ where the total monies paid in equate to the lifetime allowance.
However, there are still some workplace schemes that operate on a ‘Defined Benefit’ basis. Here, the initial lump sum plus twenty times the first year pension equates to the lifetime allowance.
If you have any questions or would like any further information, please email us at welcome@cooperfaure.co.uk.
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