All you need to know about maximising your pension

The rules surrounding pension contributions have been repeatedly tweaked over the last few years. This has resulted in a system that offers greater flexibility for contributions and withdrawals but also adds a level of complexity. Taking all this into account, it is not surprising that many fail to maximise their annual pension allowance.
Since the start of the 2010/11 tax year, we have seen tighter restrictions on the amount you (or others) can contribute on an annual basis into your pension. This started with an allowance of £50,000 but by the start of the 2014/15 tax year it was reduced to £40,000, a level that is still in effect today albeit with a further restriction for certain tax payers as explained below.
The 2016/17 tax year saw the introduction of further restrictions on the amount that you can contribute as a high earner, known as the high-income restriction. This came in the form of a tapering to the annual allowance for individuals with taxable “adjusted” income exceeding £150,000. The definition of income for this assessment is not limited to earnings from employment/self-employment. Much like the way the tax-free annual personal allowance is reduced by £1 for every £2 you earn over £100,000, the annual pension allowance is also reduced by £1 for every £2 of income over £150,000, up to a maximum reduction of £30,000, thus reducing the maximum annual allowance to £10,000.
Those with income consistently above £210,000 will be limited to a maximum pension contribution of £10,000 per tax year. If the annual allowance is exceeded, you may be subject to an annual allowance charge that effectively removes the tax benefits on the excess. In some cases, and depending on the level of income, it may be possible to reduce the level of your adjusted income through planning and then tapering may not apply.
The current rules enable you to carry forward any unused pension contribution allowances for a maximum of three tax years if you were a member of a pension scheme during the relevant years. The high-income restriction has now been in effect for two tax years, leaving one year (the 2015/16 tax year) where unused allowances may remain. This is further complicated by the fact that the 2015/16 tax year was one in which a Summer Budget resulted in changes to pension allowances with effect from the day of the Budget. As such, you would need to consider carefully the contributions made to your pensions in that year in order to assess available allowances.
It is therefore important that you review your historic pension contributions now to understand whether you are in a position to make additional contributions during the course of the tax year, in order to utilise any unused allowances from earlier years before they are lost.
A payment of £800 into a personal pension scheme by an individual can benefit from basic rate tax relief at source. Further tax relief can be claimed through your Self-Assessment Tax Return so, as an additional rate taxpayer, this means a contribution of £1,000 has an effective cost to you of £550.
While the high-income tapering rules only affect those with income exceeding £150,000, the ability to carry forward unused pension allowances is available to most people who are part of a registered pension scheme.
The information in this article does not constitute financial advice and is general in nature. If you would like specific advice tailored to your circumstances, please contact us.

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