Pensions & Non-Payable Tax: A Quick Guide
As the Tax year is drawing to a close, I’ve been getting a lot of queries regarding pension tax and non-payable tax. So, I’ve put together a quick helpful guide on these topics.
Personal pension contributions
You can put up to £40,000* per annum into a pension. If you want/need to put in more, please speak with us as it may be possible to utilise any unused £40,000 allowances for the three previous tax years . By doing so, you’ll get 20% tax relief as a basic rate taxpayer and 40% relief as a higher rate taxpayer.
So, to get £40,000 into your pension would effectively only cost you £36,000 or £32,000 depending on your tax rate. However, if your income is in excess of £150,000, the £40,000 per annum contribution limit is reduced by 50% of every additional pound of income. By the time your income climbs to £210,000 the £40,000 has dropped to £10,000. The only good news, if this affects you, is that it stays at £10,000 even if your income continues to climb above £210,000.
From this tax year onwards, the £40,000 drops to £10,000 per annum once you have accessed your pension so be careful of this. You can access your pension from age 55, drawing out as much as you want. There are two ways of accessing your cash at the age of 55 onwards. One is ‘drawdown’ and the other is by using uncrystallised fund pension lump sums (UFPLS). You can’t mix and match in the same pension fund but if you have more than one fund you could apply drawdown to one and UFPLS to another. With drawdown, the tax free 25% lump sum is paid out first, and then the remaining funds can be accessed flexibly as fully taxable income over whatever period you like. With UFPLSs, 25% of each payment is tax free and the remainder, 75%, is taxable as income.
If planning on using drawdown, be careful about putting in significant sums during the two years prior to drawing down the lump sum as charges can apply. If you’re planning on a full 25% drawdown at the age of 55, the safest thing to do would be to put in large sums more than two years prior to your planned drawdown. You should speak with a pension specialist about this.
Check your unused pension allowances
You can carry forward any of the £40,000 annual limit for three years. So, assuming you’ve had a pension in place since 2014/15 but haven’t contributed to it, you’d have allowances for 2014/15, 2015/16 and 2016/17 to carry forward to 2017/18. You’d actually have four lots of £40,000 available and could contribute £160,000 to your pension. Please note that annual contributions are capped at a level equal to your earnings for the year so I’m assuming here that you’ve had earnings of £40,000 per annum throughout those years. However, even without any earnings at all, you’re allowed to contribute £3,600 per annum.
Contribute to pensions for your family
As anyone can contribute up to £3,600 to a pension scheme, even if they have no qualifying earnings, have you considered making contributions to schemes for spouses/children? Would it be worth setting up pensions for them?
Use pensions to avoid higher rates of tax
Where your income falls into a higher tax bracket, pension contributions will enable you to effectively bring your income down so that it is taxed at basic rather than higher rate. So, with an income of £110,000 (referred to earlier), a pension contribution would be a great way to avoid the effective tax rate of over 60% that I referred to on Monday for those with incomes of between £100,000 and £150,000. Or, if you’re just into the higher rate tax band, you can make a contribution that will avoid the 40% rate (32.5% for dividends). This could also be a good strategy if you’re going to have capital gains tax to pay.
Tax-free childcare scheme
If either you or your partner has income in excess of £100,000 you must register by 5/4/18 for childcare vouchers to benefit from the new tax-free childcare scheme.
Renting out a room in your home
Be sure to tell us if you receive income from letting out a room in your main residence as you’re allowed to earn rental income of £7,500 in 2017/18 from doing this – and it will all be exempt from income tax.
£1,000 property allowance
From 2017/18 you can earn up to £1,000 from say renting out your driveway to someone – and it’s covered by a new ‘property allowance’ so will be tax-free. No relief is available however for any amounts received from:
- An employer, or a spouse/civil partner’s employer,
- A partnership in which they (or a connected party) are a partner, or
- A close company in which they (or an associate) are a participator (i.e. relief can’t be claimed where a director charges their company rent for use of their home)
Your principle private residence
If you’re thinking of selling the house that you live in and have, at some point, not lived in the house and/or let it to a third party, let us know before you sell is and we’ll check to make sure there will be no capital gains tax to pay. If you’ve lived in the house throughout your period of ownership, there’s no need to tell us as the gain on disposal will be covered by principal private residence relief – so no tax will be payable.