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There is often a lot of confusion experienced by clients when it comes to making pension contributions due to the recent changes in rules and regulation. We would like to provide some guidance on a few of the more commonly asked questions and misconceptions that surround pension contributions.
Below, you will find a range of some of the more frequently asked questions.
Can I always contribute £40,000 per annum?
Since 6th April 2016, contributions have been restricted to those with high earnings. A ‘high earner’ is typically any individual earning above £110,000 per annum. This is without taking into account any pension contributions. With pension contributions taken into consideration, it would be any individual whose income is greater than £150,000 per annum.
The amount that can be contributed reduces by £1 for every £2 that an individual earns over £150,000. Despite this it is still possible to maintain an annual contribution allowance of £10,000. Therefore, once an individual earns £210,000 or above, the contribution limit will be fixed at £10,000.
You are also restricted to £10,000 if you have accessed pension income flexibility under flexi access drawdown rules. This is known as the Money Purchase Annual Allowance.
Please refer to our Tapered Annual Allowance Guide for further information.
Can I carry forward any unused contribution allowance from the previous three tax years?
You must have been a member of a registered pension scheme during this period to be entitled. If you have never made any pension provision then the answer would be no. To be a member of a registered pension scheme does not necessarily mean it has to have been within an active pension. A ‘paid up’ pension or a pension in payment can also qualify.
You are unable to carry forward any unused Money Purchase Annual Allowance (MPAA) from the previous three tax years to Money Purchase Schemes (normal annual allowance rules allow this).
Please refer to our Money Purchase Annual Allowance Guide for further information.
Will my company receive tax relief if it contributes to my pension on my behalf?
Contributions are allowable as a business expense and therefore can come off the ‘bottom line’. However, if your company is not making any money, there is nothing to offset the contribution against and therefore no tax relief will be given. In addition, your accountant has to be satisfied that those contributions meet the ‘wholly and exclusively’ rules in order to qualify. You should seek advice from your accountant. Please find a link to the ‘wholly and exclusively’ test below.
If I make a personal contribution, allowing for a carried forward unused allowance of £170,000, will I receive full tax relief?
Personal contributions are offset against an individual’s income (net relevant earnings) during that tax year, and cannot be carried forward. Therefore, if your earnings are less than £170,000 for that tax year, you will not obtain full tax relief.
I would like to make a pension contribution but I do not have the cash either personally or within my company. Is there any opportunity to make a pension contribution without cash?
Yes, you could consider making an in-specie contribution to your pension fund. In-Specie Contributions relate to the transference of assets into a pension scheme in lieu of making a cash contribution.
On the face of it this is a very simple proposition. A member, an employer or third party simply transfers an asset to a pension scheme as a contribution and the member or employer benefits from tax relief.
Before thinking of making an in-specie contribution, specialist advice from your accountant/tax adviser should be taken.
Please refer to our In-Specie Contributions Guide for further information.
Should you require any further information on making contributions to your pension scheme, please speak to your usual financial adviser and/or tax accountant or alternatively contact Kerry Houghton on 01772 550614 or via email email@example.com