People earning higher income and are trying to save for their retirement in the most tax-efficient way need to be aware of changes made to the annual allowance in April 2016.
The government’s committed to changes that restrict the amount of pensions tax relief for individuals with income higher then £150,000 per annum.
Changes to The annual allowance
One of the main benefits of saving into a registered pension scheme is the tax efficiency, as individuals receive tax relief on their pension contributions.
The relief is available at the individual’s marginal rate of tax. So, a higher rate taxpayer will receive 40% tax relief on their pension contributions. This equates to a £60 contribution is topped up to £100 with tax relief.
Add in any employer contributions on top of this and the benefits of pension saving become clear.
However, this tax efficiency has clear upper limits. Individuals can usually contribute up to £40,000 a year (2016/17) into a pension and benefit from tax relief. This annual allowance is different for higher earners.
The tapered relief
If your total income (including bonuses, savings interest, dividends and employer pension contributions) is higher than £150,000, your annual allowance is reduced.
The reduction is tapered so that for every £2 of income above £150,000 the allowance is reduced by £1. So, if your annual income is £160,000 the allowance is reduced to £35,000.
The allowance can be reduced by a maximum of £30,000.
This rule only applies to people with an income excluding pension contributions of over £110,000. This is designed to protect people who have one-off spikes in their employer contributions.
It is still possible to carry forward any unused annual allowance from the previous 3 years.
Ensuring that you have the right level of pension income is essential for living the life you want to in retirement. Contact us today to discuss how these measures may affect you and your family and your future financial planning .