Due to the increasing number of pension rules coming into play, senior public-sector workers and high earners are at risk if they have a bonus or profit sharing scheme. It is becoming more important than ever to keep up to date with changes being introduced so regularly.
If you haven’t been keeping up to date, you could face a large tax charge. With these reductions in mind, here is a quick guide to ensure that you’re not in danger of breaching the threshold.
Currently there are no limits on pension contributions, as tax relief can only be claimed on investments of £40,000 a year or worth up to 100% of gross annual earning, whichever is higher. The annual allowance has seen massive cuts, and most recently, the allowance decreased for individuals with incomes of more than £150,000, also hitting those with earnings of more than £210,000.
Things to consider if you’re a senior public sector worker
If you’re a high earner contributing to personal pensions or occupational defined contribution schemes, you can easily see whether you’re likely to exceed the annual allowance.
Final salary pensions contributions are based on the increase on the value of a member’s accrued pension benefits over the tax year. This may raise an issue for members of final salary pension schemes.
As salary increases, final salary pensions will too. However, this may mean that a promotion could easily mean an individual’s earnings breach the £40,000 limit.
Things to consider if you’re a high earner
If you have an adjusted income of more than £150,000, your annual allowance will have been reduced from £1 to £2 of income over that limit. If your earning more than £210,000, your allowance is reduced to £10,000.
Final salary scheme members will exceed this allowance if their entitlement increases by more than £625.
If you’re a high-earner with an irregular income, it’s important to look at total income, not just earning or trading income, as peaks in dividends and one-off payments can push you into dangerous ground.
How can I beat the rules?
You might be able to carry forward any unused annual allowances from the previous three tax years. If you haven’t made any contributions since the start of 2014/15 tax year, a sum of £160,000 can be invested in 2017/18.
In some cases, if you give up some of your pension benefits, the pension scheme may pay a tax bill. As Gallacher mentions “People can use ‘scheme pays’ rules to have the pension scheme pay the tax charge and reduce their pension benefits accordingly.”
The reduction doesn’t apply if you have a threshold income of £110,000 or less. If this is the case it would be a good idea to review their affairs, as peaks in your income and employer contributions could limit their tax relief allowance. If you’re a high earner, you could also consider alternatives such as collective investment portfolios.
It is important to keep up to date with the latest changes and take the time to understand how they may affect you and your pension savings. If you are worried, talk to our financial advice team. Please call on 01926 492406 or email email@example.com to make an appointment.