Pensions are a tax efficient way of saving for your future and should always be considered as part of your year end tax planning activities. We set out what you need to know about pensions in 2024.
Why are Pensions so attractive?
Tax relief on contributions
One of the main benefits, when you pay into a workplace pension, personal pension scheme or a Self-Invested Personal Pension (SIPP), is that you can get money back from the Government in the form of tax relief. It’s a way of encouraging you to prepare for your retirement and it effectively amounts to free money, so it is important to make the most of it.
If you’re under 75 you get tax back on all your pension contributions, subject to the upper limits set out later in this article. 20% tax relief is automatically applied to pension contributions you make, or which are made direct from your salary by an employer. Higher rate taxpayers can claim an additional 20% and top rate taxpayers an additional 25% (this is not automatic and must be claimed).
20% tax relief doesn’t mean that you receive 20% of your contribution back. Instead, it is the difference between your contribution amount and your pre-tax earnings. So, for example, an £80 pension contribution would have been generated from earnings of £100 (from which the taxman deducted 20% to leave you with the £80 to put into the pension). In effect, you only have to pay in £80 for every £100 that lands in your pension.
Tax free investment gains
Investments that are made with cash from your pension benefit from high levels of tax relief. In most cases, any gains that you make from those investments can be enjoyed tax-free.
A tax-free lump sum when you retire
You can usually take up to a quarter of your pension savings as a tax-free lump sum.
Flexible access from age 55 (soon to be 57)
The popular pension freedom reforms that launched in April 2015 mean that you can now access your whole pension pot at age 55 and spend, save or invest the money as you wish. You can withdraw the whole pot in one go, although that might mean mistakenly running up a huge tax bill. Alternatively, you can choose to drawdown from your pension arrangements to provide an income that can be used to support you in retirement.
It should be noted that, from 2028 onwards, the minimum age for accessing your pension will increase to 57.
Tax efficient wealth transfer
Pension pots are not subject to inheritance tax when you die. If you die before the age of 75, the person(s) who inherit your pension pot can draw on the money as they wish, without paying any income tax either. However, if you are 75 or over when you die, a beneficiary of your pension pot will have to pay income tax on any withdrawals at their marginal rate (i.e. The highest rate of income tax that they pay).
Retaining pension wealth within the pension fund and passing it to future generations is now an extremely tax efficient estate planning solution, as it combines tax-free inheritance with tax-free investment returns and potential tax-free withdrawals. Indeed, it may even change the way we utilise our capital in retirement, possibly leading us to spend other funds before our pensions.
Wealth Management
Read more about Wealth ManagementRead moreOne of the main benefits, when you pay into a workplace pension, personal pension scheme or a Self-Invested Personal Pension (SIPP), is that you can get money back from the Government in the form of tax relief. It’s a way of encouraging you to prepare for your retirement and it effectively amounts to free money, so it is important to make the most of it.
Pension changes following the Spring Budget 2023
The Spring Budget in 2023 brought about a raft of changes to pensions with the aim of helping individuals work for longer without being punished by the various allowances in place.
The changes also provided a number of opportunities for individuals to increase their contributions into their various pension arrangements.
Annual allowance
Since April 2023, you have been able to contribute £60,000 to your pension annually, up from the previous limit of £40,000. This can also be increased if you did not use up your allowances in the preceding 3 years and were a member of a qualifying pension scheme. However, it should be noted that individuals will only receive tax relief up to the higher of your relevant earnings or £3,600.
The Government has also increased the point at which an individuals’ annual allowance will be tapered - from £240,000 to £260,000. The allowance will continue to be reduced by £1 for every £2 an individual’s ‘adjusted income’ is over £260,000 and can still affect you if your income from all sources is over £200,000. However, the minimum tapered allowance has also increased to £10,000, up from £4,000 in previous years. Therefore, individuals earning over £360,000 will still be able to contribute up to £10,000 into their pension arrangements.
It should also be noted that the Money Purchase Annual Allowance which limits how much individuals can contribute into a pension once they have ‘flexibly accessed’ their arrangement also increased from £4,000 to £10,000 in April 2023.
These changes provide opportunities for individuals who were previously tapered to be able to potentially contribute more into their pension arrangements going forwards. On the flip side, the annual allowance can affect you unexpectedly if you are a member of a final salary e.g. defined benefit (DB) or career average scheme. Should you breach the rules and pay too much, you will be subject to an annual allowance charge. Payment of this charge is the individual member’s responsibility and will be charged at your marginal rate of tax.
Income Tax in 2024: How to make the most out of opportunities
Read more about Income Tax in 2024: How to make the most out of opportunitiesRead moreThe Government has also increased the point at which an individuals’ annual allowance will be tapered - from £240,000 to £260,000. The allowance will continue to be reduced by £1 for every £2 an individual’s ‘adjusted income’ is over £260,000 and can still affect you if your income from all sources is over £200,000.
However, the minimum tapered allowance has also increased to £10,000, up from £4,000 in previous years. Therefore, individuals earning over £360,000 will still be able to contribute up to £10,000 into their pension arrangements.
Lifetime allowance
The Spring Budget saw the announcement that, from 2024, the Lifetime Allowance (LTA) would be abolished. This will be delivered in two stages, during the current tax year LTA calculations will still take place, however, the Lifetime Allowance Tax charge (previously up to 55%) would be removed with the actual Lifetime Allowance then removed from 2024.
Limits still apply to the amount of ‘tax-free cash’ an individual can receive with this fixed at 25% of an individual’s LTA (either £1,073,100 or higher if protections apply) with initial indications suggesting this will be fixed for the foreseeable future.
Despite the limitations on accessing tax-free cash, the abolition of the LTA provides huge opportunities for individuals who have previously limited their pension contributions due to LTA concerns to now restart these to take advantage of the tax-advantaged status of pensions. Moreover, individuals who have restricted their contributions in the previous tax years due to LTA concerns could potentially be eligible to make a significant contribution (up to £180,000 in some cases) by taking advantage of the carry forward rules should they have earnings to support these or are in a position to receive an employer contribution. Please note, this is a complex area and you should consult your accountant and financial adviser before making any contributions.
Opportunities for planning
Review your current contributions
- Can you pay in more to your pension following the increase to the Annual Allowance?
- Have you fully utilised your Annual Allowance from the previous 3 tax years?
- Could you sacrifice an element of your salary/bonus to boost pension contributions for the current year?
Ensure you are not caught out by tax ‘traps’
Individuals earning over £100,000 will have their personal allowance reduced at a rate of £1 for every £2 resulting in an effective tax of 60% up to earnings of £125,140. Consider making a contribution into your pension to bring your earnings below £100,000 to take advantage of the attractive tax relief available.
For example, an individual earning £125,140 can make a £25,140 contribution as follows:
Contribute £20,112 with the government adding 20% (£5,028).
As a higher rate taxpayer, you can then claim an extra £10,056 tax relief, resulting in an effective cost of £10,056.
A similar ‘trap’ occurs for individuals who earn over £50,000 and their partner claims child benefit due to the High Income Child Benefit Charge (HICBC).
Individuals earning over £100,000 will have their personal allowance reduced at a rate of £1 for every £2 resulting in an effective tax of 60% up to earnings of £125,140.
Consider making a contribution into your pension to bring your earnings below £100,000 to take advantage of the attractive tax relief available.
Consider restarting contributions following the abolition of the Lifetime Allowance
- As mentioned, individuals who have previously stopped contributions into their pensions due to LTA concerns should consider reviewing their plans following the changes announced in the Spring Budget.
- In addition, members of defined benefit (DB) schemes, such as members of the NHS scheme, who were likely to be caught out by the LTA, could now consider contributing to a private DC pension given the tax benefits on offer.
Tax efficient extraction of company profits
- Directors of a limited company can choose to make pension contributions for themselves, as well as their employees. Making contributions as a director to your own pension is a very tax efficient way of extracting capital from a company, as contributions are not taxed as income for salary or at dividend tax rates.
- Pension contributions are also deemed to be allowable expenses where made ‘wholly and exclusively‘ for the purposes of the business, which generally means that contributions for those that generate revenue for the business are a cost to the business and will potentially reduce corporation tax payable.
- It’s important to remember that you are still restricted to £60,000 per annum, as well as the £1 for every £2 reduction that applies where income and dividends is over £260,000 (down to a minimum of £10,000). Carry forward rules can also be applied where unused allowances are available form the last 3 tax years.
Risk Warnings
MHA Caves Wealth is authorised and regulated by the Financial Conduct Authority (FCA), Financial Services Register number 143715.
This communication is for general information only, is a marketing communication, and is not intended to be individual investment advice, a recommendation, tax, or legal advice. The views expressed in this article are those of MHA Caves Wealth or its staff and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. In particular, the information provided will not address your personal circumstances, objectives, and attitude towards risk.
This information represents our understanding of current law and HM Revenue & Customs practice as at November 2023. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.
You are therefore recommended to seek professional regulated advice before taking any action.
Key Risks: Capital at risk. Past performance is not a guide to future performance. The value of an investment and the income generated from it can go down as well as up, and is not guaranteed, therefore you may not get back the amount originally invested.
Investment markets and conditions can change rapidly. Investments should always be considered long term.
For further guidance
For further guidance on any of the measures discussed in this article, please contact your usual MHA advisor or contact us here
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