From 6 April 2013/14 the additional rate of tax will fall from its current rate of 50% down to 45%. This rate cut will be to the benefit of over 300,000 individuals in the UK.
As you know tax relief on pensions is still available at an individual’s marginal rate – the budget did not change that. Despite the speculation, Government resisted pressure to reduce tax relief available either via a reduction in the annual allowance or by scrapping additional rate tax relief in its entirety. So this makes the 2012/13 tax year an important one for pension contributions for additional rate taxpayers.
If you pay tax at the 50% rate you can make the maximum gross contribution (annual allowance) of £50,000 with a net effective cost of only £25,000. Once the tax rate cut comes in in 2013-14 the marginal relief falls to 45%, giving the same contribution a net effective cost of £27,500. The story becomes more compelling if you have unused annual allowance from up to three previous tax years that can be carried forward. It is feasible that a 50% rate taxpayer could make a £200,000 contribution to their pension in 2012/13 at a net effective cost of £100,000 but once the tax rate falls to 45% the net effective cost would be £110,000.
Even if you cannot use previous years allowances and were not planning to use the full allowance, additional rate taxpayers may be well advised to top-up to the maximum contribution in 202-13 by making in effect an advance payment on 2013-14, to fully mitigate tax at the 50% additional rate.
If this sounds interesting please call me to explore this topic further.