I’ve been busy lately helping clients with strategies to save income tax where they e.g. earn over £100,000, or they are (or might be) subject to the tapered annual allowance for annual pension contributions (causing tax penalties next year). Or they simply wish to look at carry forward for pension contributions but aren’t sure how to proceed. These areas are interlinked.
In the first case, you should be aware that as soon as your income exceeds £100,000, you begin to lose your personal allowance by £1 for every £2 your income exceeds it. This causes an effective income tax rate of 60% for earnings caught between £100,000 and £123,000!
In the second case, those people whose total gross income plus employer pension contributions exceeds £150,000 (“adjusted income”) are likely to have see their combined employer/employee pension contribution restricted – the tapered contributions allowance, with consequent tax penalties. This is a tricky area and many people were not ready for it last year!
But there are some simple ways of mitigating or even eliminating the tax charges which arise, using personal contributions into pension, often via unused pension allowances from the previous three tax years.
I have covered these areas in past blogs, and the links are:
- Higher Earners – are you affected by the new tapered (restricted) tax relief on pension contributions? Read on for Possible Solutions
- MPAA and Dividend Allowances cuts delayed as Finance Bill trimmed
- Annual Allowance for Pension Contributions: The Tapering rules
- Pension contributions: How they can help business owners
You might also look at the current blog on tax year end opportunities which also sets these out and links to the older blog.
Her’es an example of tax savings that can be made:
In 2017-18, Phil earns a salary of £95,000 excluding bonus, and has taxable P11d benefits of £2,000. His employer pays pension contributions of £18,000 and Phil contributes £18,000 (gross) under the net pay method. He had no bonus last year but this year has a bonus about to be paid of £50,000.
Before taking steps:
- Phil’s taxable income is £129,000. He will lose all of his personal allowance, and inter alia will effectively pay income tax at 60% on the band of earnings between £100,000 and £123,000.
- Phil’s “threshold income” for pension annual allowance purposes is £129,000. He therefore exceeds the £110,000 threshold, and the tapered annual allowance will apply.
- Phil’s “adjusted income” for pension annual allowance purposes is £165,000, which means he stands to lose £7,500 of his annual pension contributions allowance, reducing it to £32,500 (i.e. below the contributions already made!).
Phil makes a personal lump sum contribution of £23,200. This is grossed up by tax relief at source of £5,800, so £29,000 is paid into his pension.
- It reduces Phil’s taxable income to £100,000, saving £16,200 in tax (an effective rate of 55.9%!).
- The lump sum pension contribution also reduces his threshold income below the threshold for tapered annual allowance (£110,000), so his annual pensions contributions allowance is not reduced and the full £40,000 allowance applies in 2017-18.
- His total pension contributions exceed £40,000 (£18,000 + £18,000 + £29,000 = £65,000), but Phil is allowed to utilise carry forward allowance (unused annual allowance contributions) from 2014-15, 2015-16 and 2016-17 in order to cover the excess £25,000 contributed.
I agree that the foregoing isn’t the easiest to follow, so why not get advice? If you think you are affected and want to know what steps are available to you to avoid paying any more tax than you have to, I will be happy (subject to availability) to talk you through this area of tax planning free of charge by telephone. Just give me a call on 0345 013 6525 and if I can’t deal with it there and then we’ll schedule a time.