Setting up multiple companies to separate business interests can seem very straight forward. There are however important considerations. We explore the implications of owning too many companies.
The Benefits of Making Pension Contributions
14 March 2024
Accounting & Compliance, People, Reducing Tax
When it comes to pension contributions, there are a few options available to an individual which can be beneficial in both the short and long term.
There are different types of pension schemes out there but the main two ways of providing funds for retirement are via:
- Personal pension schemes; and
- Occupational pension schemes (also known as workplace pension).
If you are a higher rate taxpayer, making contributions towards either personal or occupational (employee) pension is tax beneficial because it extends the basic rate band.
But what does this mean?
Say for example that you paid £800 into private pension and say that your top rate of tax is 40%.
The amount paid is net, so it needs to be grossed up to receive that 20% relief.
This means that instead of paying tax at 20% on £37,700, you pay 20% on £38,700 (£37,700 plus £1,000 i.e. the grossed up pension contribution).
Another way of looking at it is that to get £1,000 in your pension pot it costs you just £600. (You pay in £800 and get a £200 higher rate tax reduction).
Note that if you are an additional rate taxpayer, paying tax at a top rate of 45%, you will receive relief at 25%.
As of 6th April 2023, additional rate taxpayers are individuals earning over £125,140 (reduced from the previous level of £150,000).
How else does this affect higher rate taxpayers?
Individuals in receipt of child benefit fall under the high-income benefit charge, have to pay back £1 for every £2 earnt over £50,000.
This has meant that anyone earning over £60,000 must pay back the full amount of child benefit claimed.
Following the Chancellor Jeremy Hunt’s announcement during the Spring Budget 2024, the high-income benefit charge will be increased to earnings over £60,000 after 6th April 2024, with the upper limit being £80,000.
This means a repayment of £1 for every £4 earnt over £60,000 from the 2024/25 tax year.
Paying into pension and extending the basic rate band means potentially not being liable to high income benefit charge.
There is a further benefit to additional rate taxpayers as they lose their entire personal allowance when earning over the above-mentioned amount of £125,410.
This is because the amount of personal allowance a person is entitled to, gets reduced by £1 for every £2 earnt over £100,000.
Payments into a pension scheme will extend the limit of £100,000 by the gross amount paid.
How much can you contribute?
Starting from 6th April 2023, the annual pension allowance has been increased from £40,000 to £60,000.
This means you can contribute £60,000 into your pension without incurring a tax charge.
This is provided your adjusted income does not exceed £260,000 (adjusted income is net income plus employer pension contribution made by yourself plus the contribution made by your employer).
Pension contribution tapering rules are similar to those of personal allowance mentioned above, where for every £2 earned over £260,000, the allowance is reduced by £1.
It can never be reduced below £10,000 (net contribution of £8,000).
But the good news is that you can increase your annual allowance by adding the unused annual allowance from the last three tax years!
Your retirement fund does have a lifetime allowance amount and at the moment this amount stands at £1,073,100.
It is worth mentioning that the lifetime allowance will be abolished as of 6th April 2024.
Is there a maximum or minimum contribution amount?
There is no minimum contribution.
The maximum gross contribution for tax relief that a taxpayer can make, equals to the 100% of their relevant earnings (income from furnished holiday let, employment income and trading income) or £3,600 gross – whichever one is higher.
Withdrawing funds from your pension
When you reach the age of 55 you can usually withdraw 25% of your pension fund tax free.
If you choose to take further funds they will be treated as income and therefore taxable at your top rate of income tax.
Most people wait until retirement and then take pension payments sufficient to use up their basic rate band.
When should you make a contribution?
There’s no time like now!
As we are approaching the end of the year, there is a need to stress the importance of taking action by 5th April 2024 to get tax relief in the current tax year and avoid losing allowances from earlier years.
How can we help?
If you require assistance with your personal pension position and potential tax implications please complete an enquiry form of give us a call on 01634 731390.
Our Services
To read more about our services please see our related pages below:
Blogs related to pension contributions and tax savings
Take a look at our other blogs on the topic valuing and selling your business
The Win-Win Scenario of Salary Sacrifice for Company Pensions
The McCloud Remedy: Public Sector Pension Reform Update
The content in this blog is correct as at 14th March 2024. See terms and conditions.
