High earners paying tax at 40% tax or more may wish to act soon to take advantage of the current rates of tax relief available on their pension savings. The Budget could introduce changes which cuts the tax subsidy to a lower rate. While pension savings allowances are allocated on a tax year basis, (6 April 2020- 5 April 2021), changes are sometimes effective from Budget Day. The Budget will take place on the 3rd March.
Tax breaks for pension savers now
Most UK taxpayers have an annual allowance for tax relieved pension savings of up to 100% of their earned income/ self- employed profits or £40,000, whichever is the lower, if personally funding their pension savings.
Employers can pay up to £40,000, including any personal pension savings, with no tax or national insurance to pay on the employer’s contribution. This makes employer funded pension savings the most tax efficient way of rewarding employees.
Last year the Government relaxed restrictions on pension savings for higher earners, which affected those with taxable income above £110,000. Only those with adjusted earnings (1) over £240,000 have a restricted savings allowance for pensions in this tax year. Every top rate taxpayer with adjusted income under £300,000 can now save more with the benefit of tax relief than in earlier years.
Higher rate taxpayers (over £50,000 income2) get a taxpayer subsidy of £4 for every £10 saved out of income taxed at the higher rate and a top rate taxpayer (over £150,000 income) £4.50 for every £10 saved out of income taxed at the top rate. Basic rate and non-taxpayers get relief at £2 for every £10 saved.
Pension funds incur no income tax or capital gains tax while invested. Up to 25% of the fund may be withdrawn tax free after age 55, the balance being subject to income tax at the rate payable when withdrawn. Pension funds remaining on death can be left to others and are usually not subject to inheritance tax. Where death occurs before age 75 the inherited pot can be withdrawn tax free, if after 75, it is taxed at the recipient’s income tax rate, but only as and when they withdraw funds from it.
An overall lifetime allowance for pension savings applies to each person. From 6 April 2020 this is £1,073,100. Where cumulative pension funds withdrawn, held at age 75 or on earlier death exceed this, a tax charge applies to the excess. 25% if the excess is used for annuity purchase or placed in drawdown (even if no income is taken) and 55% if drawn as a lump sum.
These tax breaks make pensions one of the most efficient ways to plan for retirement income needs and protect family wealth. Even without tax relief at higher income tax rates pension savings enjoy considerable tax benefits.
But the generosity afforded to those better off taxpayers could change and Treasury officials have considered the £10 billion* cost per year of this subsidy not to be well targeted. The call for the tax subsidy for higher earners to be cut is supported by the pension providers trade bodies and given the Government’s current borrowing requirement this could be the year that relief is cut.
Higher and top rate taxpayers still building up their retirement funds may wish to consider pension savings before Budget day while the higher rate relief remains. LEBC is here to help, please contact your usual adviser or firstname.lastname@example.org or call 0800 055 6585.
Public Policy Director
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.
*Red Book HM Treasury 11 March 2020
(1). Income is defined as all gross taxable income plus employer pension contributions.
(2). England, Wales and Northern Ireland. Taxpayers resident in Scotland get 41% relief on income over £43,430 and 46% on income over £150,000.
The levels, bases and reliefs from taxation are subject to individual circumstances and could be subject to change. The Financial Conduct Authority does not regulate taxation advice
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.
Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.
This article is for information purposes only and has been compiled on our understanding of current HMRC taxation rates applying for the tax year 2020/21.
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