20 April 2018

Pension allowance: Make sure you enjoy your rainy day to the full

According to latest available figures, over recent years, there has been a sharp upturn in the number of people breaching government rules on the annual pension allowance and who are running risk of HMRC clawing back tax perks.

Between the tax years 2012/13 and 2014/15 there was a staggering 79% increase in the number of people who saved more in a pension in a single year than the rules allow.

What has become ever-more apparent is that increasingly complicated pension rules are stalling a government drive to persuade people to save for later life. Now, more than ever, is the time for tax experts to step forward and offer help.

Annual pension allowance

If your pension savings exceed the annual pension input limit, generally £40,000, then there is an annual allowance charge. The effect of the annual allowance charge is to reduce tax relief on any pension saving over the annual allowance.

Unused allowance from the previous three tax years can be carried forward and utilised in the current tax year.  Therefore, for the current tax year ending 5th April 2019, unused allowance can be utilised from 2015/16, 2016/17 and 2017/18, with special rules applying for the transitional 2015/16 year. 

Other points to remember:

  1. If total adjusted income exceeds £150,000, the annual allowance starts to taper down from £40,000 and will be reduced to £10,000 where income is £210,000 or more. 
  2. The allowance can reduce to as low as £4,000 if money has been withdrawn from the pension. 
  3. There is a lifetime allowance of £1.03 million.

Annual allowance charges

The annual allowance charge is not at a fixed rate but will depend on how much taxable income an individual has and the amount of their pension saving in excess of the annual allowance. Hence for a higher rate taxpayer the charge would be 40% on the excess over the annual pension allowance. Note that annual pension input includes any contributions made by the employer and it may be those contributions that trigger the charge.

Pay tax out of your pension

You can ask your pension provider to pay HMRC out of your pension pot if you’ve gone over your annual allowance and the tax is more than £2,000. You must tell your pension provider before 31 July if you want them to pay the tax charge for the previous tax year.

It's our job to keep up to date, so you don’t have to…

This where RWB's experienced tax team comes in. It's our job to keep up to date with regulations to make sure your money is ready for when you decide it's time for you to enjoy it. Contact our expert tax team on 0115 964 8888 or email enquiries@rwbca.co.uk today.

The views provided in this article are for general information purposes only. Nothing in this article represents advice of any nature whatsoever. Accordingly, RWB CA Limited does not accept any liability or responsibility for the information contained in this article or any decision or other action that may be taken in reliance upon the information contained within it. RWB CA Limited accepts no responsibility for any errors of fact or opinion and assumes no obligation to provide you with any changes to its assumptions.