Personal contributions into a personal pension plan are usually paid net of basic rate tax. This is because the contributions are made from income, which has been taxed. The pension plan provider will reclaim the basic rate of tax paid on the contribution from Her Majesty’s Revenue and Customs (HMRC) – this is commonly known as tax relief – and add the reclaimed tax to the net contribution to make a gross contribution. The gross contribution is the total amount invested.
Example of Tax Relief on contributions:
If you wish to make a net of basic rate tax contribution (does this wording in italics make sense?) of £200 each month into your plan, you would see a contribution of £250 a month gross being invested. This is because 20% of the £250 (£50) is tax relief, which the provider will claim back from the government (HMRC).
If you are a higher rate tax payer, you can reclaim the difference between the basic and higher rate tax bands through your tax return. This will be at your highest marginal rate – so, for example, if you are a 40% taxpayer, you’ll be able to reclaim an additional 20%. You will receive this tax relief on the personal contributions you make into all of your personal pension plans up to the greater of (should this read something like ‘up to your maximum UK earnings’?) your UK earnings (subject to the Annual Allowance) or £3,600 gross each year. This means that if you earn, say, £20,000 a year before tax, you could pay in to your personal pension up to £20,000 a year; but if you earn less than £3,600, you can still pay in up to £3,600 and get tax relief on those contributions. As in the previous example, you would only actually pay £2,880 and the provider would claim back £720 for you.
Annual Allowance
By law, there is a maximum total amount that can be paid in to all pension plans, held in your name, each tax year that will be eligible for tax relief. This maximum is called the Annual Allowance and is £40,000 from the 2018/19 tax year onwards. This amount includes contributions made by you and by anyone else – for example, your employer, into your plan. If total contributions exceed this limit in any year, tax will be payable on the excess, at your marginal rate.
It may also be possible for you to carry forward any unused Annual Allowance from the previous three tax years, to reduce or remove a tax charge on the payment above the Annual Allowance limit.
Please Note: Since 6 April 2016 the Annual Allowance, for higher income earners, has been tapered (reduced).
If you have a total taxable income in excess of £110,000 (this is known as Threshold Income), your Annual Allowance will be reduced by £1 for every £2 of ‘Adjusted Income’ you have between £150,000 and £210,000. This means the Annual Allowance can be reduced by up to £30,000 – from £40,000 to a minimum of £10,000.
In addition: If you’ve taken certain types of pension benefits, you’ll have a reduced Money Purchase Annual Allowance (MPAA) of £4,000. Your overall Annual Allowance will still be £40,000, but your Annual Allowance for all money purchase plans (such as a Personal Pension Plan) will be £4,000. You’ll have this lower Annual Allowance if you’ve:
This isn’t a full list. You should speak to your Financial Adviser if you’re unsure what level of Annual Allowance applies to you. If the £4,000 limit applies to you, you won’t be able to carry forward any unused Annual Allowance from previous years.
Important: These pages give readers an overview of the subjects listed. For a more in-depth definition of “Threshold Income”, “Adjusted Income” “Carry Forward” and for further information around the Tapered Annual Allowance please go to www.gov.uk and search:
If you’re unsure what level of Annual Allowance applies to you or if you want to pay in a large contribution and have unused allowance from previous years, please speak to your Financial Adviser.
Contributions can be made by way of a single, regular (monthly or annually) contribution? and/or a transfer (when you transfer an existing personal pension into another personal pension). Contributions are commonly invested in a range of insured pension funds, although there are other areas (is there a better word than ‘areas’ here? Maybe ‘options’?) that can be used. These pension funds are managed by specialist fund managers and include funds that invest in countries around the world (geographical areas) such as North America, Europe, Asia, for example, or funds that invest in sectors of industry – Technology, Banking – or asset types, Property, Fixed Interest and Equities. (Double check that by inserting long dashes I have still made the previous sentence make sense).There are also fund managers who specialise in Multi Assets – a combination of stocks and shares, property, fixed interest investments and cash.
It is recommended that when saving for your retirement, you should review how your pension is performing – all investments can go down as well as up – to make sure you are on track to accomplish your savings aims.
Please contact LR Connections on 0345 314 8972 for an appointment to discuss how we could help you.
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