Making Additional Pension Contributions: A Bold Move You Should Consider Today

According to Philip Hammond, the £38 billion that the government pays towards pension tax relief is “one of the last remaining pots of gold we can raid”. In a push to find the extra money that he needs, there is a strong chance that the Chancellor may implement more pension tax relief cuts in the near future. With this in mind, there is a lot of speculation surrounding the topic and, making additional pension contributions earlier rather than later could be your best option.

Read on to find out more about relief on contributions and what the future may hold.

Tax Relief on Pension Contributions

Today, a pension contribution of £100 will cost you £80. This contribution is free of tax and the pension provider will claim the extra £20 tax relief from the government. This £100 contribution goes into your pension plan. As an additional rate taxpayer you must contribute £55 and as a higher rate taxpayer, you must contribute £60.

Are We Seeing a Reduction in Relief?

From 2016, the rules changed. Only people who earn a total income of more than £150,000 from any source will receive tax relief on pension contributions. This means that the annual pension allowance decreased from a whopping £40,000 to just £10,000 for those with income of more than £210,000.

Despite the above, today, you can still carry unused allowance from one year to the next for up to 3 years leading up to the tax year in question. As a result, you still have plenty of time to make tax-efficient contributions.

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Should You Make Additional Pension Contributions Sooner Rather Than Later?

Even if you don’t fit within the bracket of taxpayers that receives a reduced annual allowance, you should do your utmost to pay any voluntary pension contributions as soon as possible. This is because there is a lot of uncertainty surrounding the future of tax relief on pension allowances.

Before the release of the annual Budget this year, there was talk of the introduction of a flat rate. While there are little to no details on this, the chances of this being equivalent to or higher than the current tax relief are slim.

What About Non-Taxpayers?

Whether you pay tax or not, you have the right to claim relief on contributions below the yearly maximum. Today, if you don’t pay tax, you can receive basic rate tax relief of £3,600. Basically, you can contribute £2,880 a year and the pension provider will invest £3,600.

If you make larger contributions, you won’t receive more than the maximum allowance of £3,600. Also, if HMRC gives you extra tax relief, you may have to pay this back at a later date. As of now, we don’t whether there will be any changes to non-taxpayer rates. That said, if you want to make voluntary pension contributions, we recommend you do so now as a contingency plan.

Source: Pixabay

Expert Tip: Seek Professional Advice!

If you want to make additional pension contributions, it’s important you understand the different pension schemes available as well as the tax relief involved.

But, with changes on the horizon, knowing what your best options are can be challenging. With this in mind, we recommend you seek professional advice.

At Newnham & Son, we tailor our services to our clients’ needs. Whether you’re a young entrepreneur or thinking of retirement we can help you plan for the future. If you would like to know more about our business or personal services, contact us today. We’re always on call to help with any queries you may have.