1. Get personal tax relief at top rates
- For individuals who are higher or additional rate tax payers this year, but are uncertain of their income levels next year, a pension contribution now will enjoy tax relief at their highest marginal rate. This has a positive impact on employees whose remuneration can fluctuate year on year perhaps through bonus payments, or self-employed clients who have had a good year this year, but are not predicting repeating it in the next. Adapting the carry forward and ‘Pension’s Input Period’ rules provides the opportunity for some to pay up to £240,000 tax efficiently in 2013/14.
- For example, an additional rate taxpayer this year, who feared their income may dip to below £150,000 next year, could potentially save an extra £5,000 on their tax bill if they had scope to pay £100,000 now.
2. Pay employer contributions before corporation tax relief drops further
- Corporation tax rates are falling, expecting to reach 20% by 2015. Business owners who are considering boosting pension provision for key staff over the coming years should consider bringing forward those plans to benefit from tax relief at the higher rates. Payments should be made before the end of the current business year, while rates are at their highest.
- For the current financial year the main rate is 23%. This drops to 21% for the new financial year starting 1st April 2014.
3. Sweep-up unused allowance from 2010/11
- Use it or lose it – unused pension annual allowance from 2010/11 tax year must be used this current tax year. The annual allowance still available is £50,000 so for a 40% taxpayer, this could mean a missed opportunity to save up to this amount at a net cost of only £30,000.
4. Make the most of the £50,000 pension allowance
- The annual allowance drops to £40,000 from the new tax year. But the ‘Pension’s Input Period’ rules mean that some clients are paying towards this limit already.
- Carry forward for the three previous years back to 2010/11 will still be based on a £50,000 allowance. But over time, the new £40,000 allowance will come into the calculation and dilute what can be paid. Up to £200,000 can be paid to pensions for this tax year without triggering an annual allowance tax charge. By 2017/18, this will drop to £160,000 – if the allowance stays at £40,000.
5. Avoid the child benefit tax charge
- An individual pension contribution can ensure that the value of child benefit is saved for the family, rather than being lost to the new child benefit tax charge. And it might be as simple as redirecting existing pension saving from the lower earning partner to the other.
- The child benefit, worth £2,449 to a family with three children, is cancelled out by the tax charge if the taxable income of the highest earner exceeds £60,000. There’s no tax charge if the highest earner has income of £50,000 or less. As a pension contribution reduces income for this purpose, the tax charge can be avoided.