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How Much Can I Contribute to My Pension and What Happens If I Exceed My Allowances? With people living longer, healthier lives, planning for your future is more important than ever. Making regular contributions to your pension fund will help to build up your nest egg and give you a better quality of life once you retire. But getting the most out of your money isn’t always straightforward. Tax relief on pension savings has shrunk dramatically over the past ten years, and in order to maximise your investment it’s important to know exactly where you stand. In this article, we’ll outline all the latest tax thresholds, look at what happens when you breach your pension allowances, and help you make the right decisions for your future. How Much Can I Pay into My Pension? Pensions are by far the most tax-efficient way to save for your old age, but there are certain restrictions on how much you can pay into your pot and still get tax relief on your savings. The first is the annual allowance, which dictates how much you can accrue in tax-free pension savings each year. This is currently £40,000, or 100% of your earnings if your income falls below this threshold. The annual allowance covers every pension that you belong to (it is not a ‘per scheme’ allowance) and applies to any and all contributions that you, your employer or any third-party pays into your pot. As well as limits on yearly savings, there is also a cap on how much you can contribute to your pension over your lifetime. This is currently fixed at £1,055,000, and anything above that is subject to tax. What Happens If I Exceed My Annual Allowance? You can pay as much as you like into your pension over the course of a year, but once you exceed your annual allowance, you’ll have to pay tax on the excess. For example, if you earn more than £40,000 a year and pay £45,000 into your pension pot, £5,000 of that will be taxable. This is called an annual allowance charge, and it will be added to the rest of your taxable income when calculating your tax liability for the year in question. If you do go over your annual limit, you may be able to offset some or all of the excess by bringing forward unused allowances from the previous three years. In order to benefit from this ‘carry forward’ process, you must have: • Earned at least the amount you wish to contribute in total for that particular tax year (unless your employer is making the contribution) • Been a member of a UK-registered pension scheme in each of the tax years from which you wish to carry forward (this does not include the state pension) Pension planning can be a particularly complex issue, and if you’re worried about exceeding your annual allowance, it might be worth speaking to a professional. Here, at Wisteria, our team of specialist tax advisers can help you get the most out of your pension. We’ll provide expert advice and guidance and make sure you’re not paying any more tax on your savings than you need to. What Happens If I Exceed My Pension Lifetime Allowance? As mentioned above, you’ll also face certain penalties if you breach your lifetime allowance. As of April 2019, the threshold is £1,055,000, but this is expected to rise to £1,073,000 in the next tax year, in line with inflation. You won’t pay a penny piece in tax on any of your pension savings that fall below the lifetime allowance, but once you exceed the threshold, you’ll start to feel the pinch. You’ll only be charged on the excess once you draw on your funds, and how you decide to take your money can make a big difference: • If you decide to take the excess as pension income, you’ll be charged at 25% and also have to pay any income tax on the balance • If you take the excess as a lump sum, you’ll be charged 55% • If you choose to draw your savings at age 75 or beyond, the lifetime allowance tax charge will be fixed at 25% What Is the Tapered Allowance and How Does It Affect Me? In this year’s Budget, the Chancellor announced big changes to the tapered allowance threshold for pensions, and for higher-income earners, it could prove significant. The tapered annual allowance effectively reduces the amount of tax-free pension savings you can accrue in a year once your earnings hit a certain level. Currently, the threshold kicks in at £110,000, and if your annual income plus your pension contributions exceed £150,000, the government starts to eat into your personal allowance. In fact, for every £2 you earn over the limit, the amount you can accrue tax-free in your pension is cut by a £1, up to a maximum of £30,000. Thankfully, under the new legislation, the threshold will be raised, which should see more people keeping more of their hard-earned cash. Here are the key points of the new policy: • The income threshold will be increased from £110,000 to £200,000 • Adjusted income (your earnings plus pension accruals) will increase from £150,000 to £240,000 • The minimum tapered annual allowance will fall from £10,000 to £4,000 Speak to the Experts Planning for your retirement can be a bit of a minefield, and if you want to make the most of your pension, it pays to speak to a professional. If you have any questions about the issues raised in this article, or you’re afraid you’re missing out on certain tax breaks, pick up the phone or drop us an email. Our team of financial specialists are on hand to provide all the help and guidance you need.
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