How much can I pay into my Pension and what if I am a high earner and/or the owner of the business?
Normally between you and your employer you can pay a maximum of £40,000 into your pension in a tax year (but note that as an employee you can only receive tax relief up to the amount of your earnings). This £40,000 limit is called the annual allowance.
You and your employer can use any unused annual allowance from the last three tax years but only if you had a UK registered pension in those years. The concept of using previous annual allowance is called carry forward. Please see below the annual allowances by tax year/payment input period:
6 April 2019 to 5 April 2020 £40,000
6 April 2018 to 5 April 2019 £40,000
6 April 2017 to 5 April 2018 £40,000
6 April 2016 to 5 April 2017 £40,000
.When it comes to your personal contributions into a pension, if you are under the age of 75, you normally receive tax relief only up to your earnings in the tax year.
This does not include savings income or pension income. Any personal contributions above your earnings may result in tax relief being clawed back.
Your employer may also make contributions and these are not limited by your earnings. (note that contributions would be entitled to relief of Corporation Tax)
However, any contributions above the annual allowance will result in a tax charge if there is no option for carry forward.
What if I am a high earner?
As of 6 April 2016, the annual allowance for high earners was reduced. This reduction is called the tapered annual allowance (TAA) and reduces the annual allowance by £1 for every £2 above earnings of gross (pre-pension contribution earnings) of £150,000 p.a.
This covers all earnings including savings and pension income as well as the value of your employer’s pension contributions.
Your annual allowance can only be reduced to £10,000 p.a. when you reach the £210,000 p.a.threshold or above.
You will still be able to carry forward unused annual allowance from previous tax years and if your income subsequently drops to below the threshold you will be restored to the normal annual allowance for that tax year. If you have earnings of £110,000 p.a. (post-pension contributions) you will not be affected by the TAA.
If you are likely to be affected by the TAA, you should ask your employer if there is an alternative benefit to being a member of a pension scheme. Bear in mind that, even with a tax charge, your employer’s pension scheme may still be a valuable benefit.
If YOU are the EMPLOYER or your employer is happy to discuss, then we can show you how to maximise your pension contributions without necessarily affecting the TAA.
Alternatively, you may wish to consider other investments with tax incentives.
We would be happy to discuss alternative tax efficient pension routes with you as an employer/business owner or as a high earner.