The pension annual allowance for 2020/21 is £40,000 which includes contributions made by both you and your employer.
Most people pay a small amount of their employment income to a pension but you can actually contribute up to 100% of your earnings to a maximum of £40,000pa. The annual allowance can also be carried forward for up to three years, so investors should consider whether they have made use of their annual pension allowance ahead of the end of the tax year.
What are the benefits:
Tax relief: Pensions are a very tax efficient way of saving for retirement. Contributions made to pensions receive tax relief at the member’s highest marginal rate. This means you will either receive a top-up from the government directly into your pension fund and/or an adjustment of tax on your tax returns. In addition, the underlying investments are not subject to income tax or CGT so grow free of tax within the pension.
Reclaim Annual Allowance: The tax-free personal allowance for most people is currently £12,500. When your taxable income reaches £100,000, your personal allowance is gradually reduced until it is completely lost when your income reaches £125,000.
For example, someone who earns £110,000 will be paying an effective tax rate of 60% on the £10,000 due to the lost personal allowance. This means of that £10,000 they only receive £4,000 after tax.
If you are in this position you could consider putting the £10,000 into your pension in order to maintain your personal allowance whilst saving more for your future.
Loss of Child Benefit Allowance: All parents are entitled to child benefit, but as soon as one of them earns more than £50,000 the benefit begins to reduce and is completely lost by the time they reach £60,000.
However, parents who aren’t too far over the threshold can get around this by increasing their pension contributions. Child benefit entitlement is decided based on your salary after pension deductions. This means if you contribute to your pension enough to bring it back under £50,000 then you can claim full child benefit.
At SFIA our advisers are on hand to answer any questions you may have about the tax year-end or any tax planning matter and can help you navigate the best course of action. Feel free to get in touch for a no obligation consultation.