The additional rate threshold was cut to £125,140 from £150,000 from 6 April, so certain higher earners will see a larger proportion of their salary fall into the highest income tax bracket. But careful planning can see pension savers reduce their tax bill – and boost their retirement prospects. Some individuals could save up to £81,000 on tax in one year.
Avoiding the personal allowance trap
Pensions can be particularly valuable for those with earnings above £100,000. If you earn over £100,000 per year the minimum pension tax relief your contribution will get is 45%, and for certain individuals it can be as high as 60%. Expert, independent advice can help provide clarity. This is one of the areas covered in our free Financial Health Check.
Cut tax bills with prudent planning
The standard annual allowance for pension contributions has risen from £40,000 to £60,000. Those with an adjusted income that’s above £260,000 will see their annual allowance tapered down to a new minimum threshold of £10,000. As the example (below) shows, someone with earnings of £150,000 could contribute £60,000 to their pension, and achieve total tax savings of £30,000 (including the top-up contributions paid by the government).
Certain individuals may be able to make higher contributions by ‘carrying forward’ unused annual allowances from the three previous tax years. You must use the annual allowance in the current tax year first, before carrying forward from prior years. Carry forward from 2020/21 must be used in the 2023/24 tax year, or it will be permanently lost.
Free from inheritance tax
Your pension can be passed on to your children, or other beneficiaries, without being subject to inheritance tax. It may be possible to repeat this over several generations, leading to even greater tax savings. Pensions passing to beneficiaries before the age of 75 can also be taken free from all income tax.
Understanding pensions and complex tax rules can be daunting, but an independent financial adviser can explain complexities and help you fully optimise available tax breaks and allowances as part of an efficient financial plan. Call 03300 564 446 to find out more, or get in touch via the contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
