Pension contributions can be an excellent way to reduce your tax obligations.
With the end of the 2023/24 tax year coming up on 5 April, now is your final chance to take advantage of annual reliefs and allowances.
Annual allowances
There is no limit on how much you can pay into your pension pot, however, there is a limit on how much you can pay tax-free.
All the pensions that you pay directly and any pensions that are run by your employer all count towards this threshold.
Combined, you can put up to £60,000 into a private pension each tax year without paying tax.
Salary sacrifice and pension contributions
If your income is just above the higher or additional rate Income Tax threshold, you may want to make use of a salary sacrifice scheme.
This is offered by some employers where your pension contributions are paid directly from your earnings.
By doing this, you reduce your taxable salary. As a result, you will pay less Income Tax and National Insurance, and even reduce your Income Tax threshold.
Threshold income vs adjusted income
Your income can affect your tax allowances and reliefs, as they are applied on a tapered scale using two measures.
These are your threshold income, which is your income excluding pension contributions, and your adjusted income, which is your income including pension contributions.
Your pension contribution allowance decreases if your threshold income is over £200,000 and your adjusted income is over £260,000.
You can calculate your pension allowance using HM Revenue & Customs (HMRC) guidance.
Accessing your pension
Your tax-free threshold may also be reduced if you access your pension pot. This includes taking cash or a short-term annuity from your pension on a flexible basis.
It is best to check with your pension provider whether the flexibility of your pension will affect your tax obligations.
With this type of pension, you are only able to put in £10,000 for the current tax year.
Lifetime Allowance
In April, the Government will be abolishing the Lifetime Allowance (LTA) on pensions. Under the previous legislation, you paid tax on pensions savings above £1,073,100.
The new legislation introduces two new systems for taxing pensions. The Individuals Lump Sum Allowance (LSA) will be set at £268,275 and the Individual Lump Sum and Death Benefit Allowance (LSDBA) is to be set at the same rate as the LTA.
This is another thing to consider when planning your pension.
Reaching the allowance
Once you have reached the £60,000 allowance, paying more into your pension pot can create a tax liability.
There are other options available to you to help improve the tax efficiency of your income. These include:
- Paying into an ISA
- Making a gift from your salary to a charity
- Asking your employer if they offer a salary sacrifice scheme – although this will only affect future tax years.
Paying into your pension is a great way to plan your future whilst reducing your tax obligations in the present.
It is best to make use of your £60,000 allowance before the end of the tax year if you haven’t already.
For help on your pension contributions and tax planning, speak to a member of our team today.