Higher rate tax payers should strongly consider upping their pension contributions while they can warns financial adviser

18th January 2016


Individuals subject to the higher rate of income tax should strongly consider maximising their pension contributions while they can, as it really could be their last chance saloon to do so at such attractive levels of relief, investment group Tilney Bestinvest has warned.

While nobody is sure of what the Government will announce in its next Budget, there has been a great deal of noise that the upcoming one will see the end of the ability to achieve higher rate tax relief on pension contributions with one of option being a flat rate of relief  of 33%.

This would still be attractive to most, but is far less generous than the current potential relief of 40% or 45% for higher and additional rate taxpayers.

As a result of this, ensuring that you have used all allowances available to you if you are in a position to fund them and achieve such attractive levels of relief while they remain available, is crucial ahead of any changes.

David Smith, director of financial planning at Tilney Bestinvest highlights that quite simply, higher earners have never had it so good in terms of pension tax reliefs but “the sun looks like it is going to set on the Golden Age of pension tax relief”.

Smith points out that very high earners, may be able to further reduce their potential tax liability this year if they did not fully utilise all their annual pension allowances in the three previous tax years, two of which were when the annual pension allowance was at the higher rate of £50,000 per year.

This is because of a rule known as ‘Carry Forward’, which allows savers to mop up unused allowances for the three years previous once they have exhausted their current year’s pension allowance.

Importantly, this utilising of hitherto neglected allowances is set against the current tax year’s earnings.

Smith explained: “It should be noted that personal contributions cannot exceed 100% of earned income. While employer contributions are able to exceed this amount, they are still subject to the annual pension allowance limits.

“For someone who has not used any of their annual pension allowances this year or the previous three years, the maximum contribution this year could be £180,000, due to a change in legislation, in some instances it could be possible to contribute up to £220,000 during the current tax-year.”

For anyone earning £330,000 or more, the net cost after 45% relief of the contribution would be £99,000.

“That is, clearly, incredibly attractive and not all of the relief is trapped inside the pension. Furthermore, the individual would immediately be removing the gross pension contribution from their Estate for inheritance tax purposes, which could represent a further 40% tax saving,” adds Smith.

In the example below, the investor is eligible to firstly use their £40,000 pension allowance for the current tax year but also  ‘Carry Forward’ unused allowances of £100,000 from the previous three years, leading to a total maximum contribution of £140,000.

Assuming the investor earns £290,000 or more, this would require an actual payment of £112,000 into the pension (£140,000 net of 20% tax relief) which would then be topped up by the state by £28,000. The investor would then also be eligible for a further tax refund from HM Revenue & Customs of £35,000 through their self-assessment process which would not be tied up within the pension.

In this example, for the investor the net cost of the £140,000 contribution would therefore be just £77,000.

Year Annual Allowance Amount Contributed Carry Forward
2012/2013 £50,000 Nil £50,000
2013/2014 £50,000 £20,000 £30,000
2014/2015 £40,000 £20,000 £20,000


Pensions versus property
While consumer research has shown that many perceive Buy-to-Let property ownership as a desirable way to fund a retirement, often due to the tangible nature of the asset, the Chancellor has recently had it in his cross hairs.

Smith added: “The impact of many of the most recent changes is yet to be seen, but with an increase in stamp duty it could diminish demand as it is likely to reduce profit margins on subsequent sales but also dampen buyers’ demand.

“This is compounded by further changes meaning that the ability to offset buy-to-let mortgage interest against rental income for tax purposes will gradually reduce. This could result in an additional tax bill of many thousands of pounds for higher rate tax payers.”

Smith thinks that following on from his swashbuckling raid on Buy-to-Let property investing, the next source of plunder for our “Corsair Chancellor” will be pension tax reliefs.

He said: “With pensions still the key source of income during retirement, higher earners in a position to make significant contributions should strongly consider doing so while reliefs are available at currently generous levels.

“Those that do not have cash available might consider carefully realising existing non-pensions investments, within their annual capital gains tax allowances, to fund such contributions. But the clock is ticking to potentially act this tax year.”


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