High earners lose out on pension contributions

Under the present tax rules anyone making a pension contribution can get tax relief at their marginal rate. Further details are in Pensions: a 20% off sale!

In summary, if you are a basic rate tax payer and wanted to pay £100 into your pension plan your cash contribution would be £80.  Your £20 tax credit would bring your contribution up to £100. For a 40% taxpayer your contribution would be £60 and for a 45% tax payer your contribution would be £55. The tax relief is available on contributions of up to £40,000 each year.

These reliefs are designed to encourage all of us to save more foryour retirement. The more you earn, the mor attractive the relief is to you.

However in the Summer Budget 2015 the Chancellor announce a change to these rules for those earning over £150,000.

From April 2016 the relief will be reduced at a rate of £1 for every £2 earned over £150,000, until the tax limit has reached £10,000.

The individual limits will be:

Earnings                                               Pension tax allowance

Up to £150,000                                     £40,000

£160,000                                              £35,000

£170,000                                              £30,000

£180,000                                              £25,000

£190,000                                              £20,000

£200,000                                              £15,000

£210,000+                                            £10,000

Be aware the definition of “earnings” is broader than just salary. It also include a pension contribution made by your employer. So an individual earning £110,000 with a £40,000 contribution from their employer will also fall into the new rules.

Anyone with income excluding pension contribution below the £110,000 threshold will not be subject to this taper.

The new rules do not come in until April 2016. If you are a high earner there is a window of opportunity until then to maximise your pension contributions. Using the previous three years carry forward allowances you can make a total contribution of up to £180,000 in this tax year.  This could be a useful planning strategy for anyone who has come into large amount of funds for example, through a bonus, sale of a business, or inheritance.

If you have a query on your pension and would like to discuss it, please call on 01932 698150.

photo credit:flickr/Simon cunningham