Tax planning opportunities with pension contributions
For adviser use only
As we approach the end of the 2016/17 tax year, there are real opportunities for you, as advisers, to add value to clients’ tax planning process. The payment of contributions to a registered pension scheme can bring many tax advantages, as the following opportunities demonstrate:
Higher rate tax
The tax-free personal allowance for 2016/17 is £11,000 with basic rate tax at 20% applying to the next £32,000 of taxable income. Assuming no benefits in kind or unpaid taxes, a client will pay tax at 40% on income above £43,000. If a client has a total income of say £47,000, he/she will pay tax at 40% on £4,000. Alternatively, the payment of a personal contribution to a registered pension scheme of £3,200 net (to a scheme operating tax relief at source) means that such a client could avoid paying any higher rate tax.
Clients with taxable income in the region of £50,000 to £60,000 (or more) with children qualifying for the payment of child benefit may be interested in making personal contributions to a registered pension scheme. This could reduce their ‘adjusted net income’ to retain part, or all, of their entitlements to tax free child benefit.
Loss of the tax-free personal allowance
Clients with taxable income in excess of £100,000 will see their tax-free personal allowance withdrawn by £1 for every £2 of ‘adjusted net income’ above £100,000. It will be lost completely if income reaches £122,000. In these circumstances, the payment of a personal contribution of £17,600 net to a registered pension scheme will reduce their ‘adjusted net income’ to £100,000, effectively ‘reinstating’ their full tax-free personal allowance and giving an effective rate of tax relief on the contribution at 60%.
Additional rate tax
Clients with taxable income of £150,000 or more will pay tax at 45% in the 2016/17 tax year. The payment of a personal contribution to a registered pension scheme within the Annual Allowance (or their specific Tapered Annual Allowance where this applies), plus the carry forward of any unused allowance from the previous 3 years, will increase the income threshold beyond which the 45% tax rate applies. This will give the maximum level of tax relief available.
Clients who have already ‘flexibly accessed’ their pension benefits, and are keen to continue making pension contributions, need to bear in mind the Money Purchase Annual Allowance that applies to their contributions thereafter to a defined contribution scheme, set at £10,000 for 2016/17, is proposed to reduce to £4,000 for 2017/18 and beyond. Anyone in a position wishing to maximise their pension savings will need to consider making contributions before 6 April 2017.
As an alternative to personal contributions, employed clients at all salary levels may wish to consider the use of salary and/or bonus sacrifice to achieve similar results as above. This will lead to the employer paying the sacrificed amount as an employer pension contribution, prospectively adding part or all of the National Insurance saving to boost the pension contribution further.
A New Year, a New Review
At this time of year, many advisers will choose to review their client bank, segment the clients into the appropriate salary bands and target their communications and activity appropriately.
Recommending the payment of a pension contribution may help clients reduce the amounts of higher rate (or additional rate) tax they pay, retain their entitlements to existing tax allowances and benefits and boost the value of their pension savings, adding real value to the adviser/client relationship.