Tax relief for pension payments - act now to avoid missing out before the end of the tax year

There is possibly still time to make a contribution to your pension plan before the end of the fiscal year. Individual taxpayers and employers can make contributions to individuals retirement plans  providing these contributions are within the individual’s available Annual Allowance (‘AA’). As eligible pension contributions reduce tax liabilities and investments within the plans can grow free of tax, making pension contributions is a tax efficient form of saving. In this article, senior tax consultant Robert Redfern examines pension tax relief and the steps you should consider before the end of the current tax year.

Pension tax relief

Individuals who make contributions into a pension may receive tax relief on their contributions. Similarly, employers may receive tax relief on contributions made on behalf of their employees.

 Providing the total savings to an individual’s pension are within their available AA, no tax charges arise on the individual. The AA is £40,000 for the current 2022/23 tax year, and from 6 April 2023 will increase to £60,000 per year. Any pension savings in excess of this amount may be subject to tax.

An individual can bring forward unused AAs from the 3 previous tax years, provided they were a member of a pension scheme in those years. However, they must fully use the available AA in the current tax year before allocating any unused AAs from previous years.

So, for example, to use any unused AA from the 2019/20 tax year, an individual would need to have contributions in excess of their available AA for the current 2022/23 tax year. Any unused AAs from the 2019/20 tax year will be lost if they are not used before 5 April 2023. 

Reduction to the Annual Allowance

The AA of £40,000 will be tapered if an individual’s “Threshold Income” and “Adjusted Income” both exceed the limits £200,000 and £240,000 respectively. The Adjusted Income limit is increasing to £260,000 from 6 April 2023.

Currently the tapering reduces the AA by £1 for every £2 that Adjusted Income exceeds the limit and reducing the AA to a minimum of £4,000, and from 6 April 2023 the minimum AA will be £10,000. Detailed provisions are applied to determine the Threshold Income and Adjusted Income- sensible planning can help maximise the opportunities available.

Where total annual pension savings exceed the available AA, then tax charges are applied. It is therefore important for individuals to review their AA, pension savings and unused allowances to establish their position.  

What should you do now?

With the 5 April tax year end approaching, you may wish to assess your pension contribution limits for this year and consider whether to take any action.

 If you would like to discuss this, please contact Robert Redfern at robert@sandersgroup.co.uk. 

 Please note, the content of this article is for information purposes only and should not be relied upon as formal advice.