News and blog

4 things high-earners should know about pension contributions

1. Personal allowance for high earners

Currently, the personal allowance is reduced by £1 for every £2 of taxable income over £100,000. The current individual allowance of £8,105 would be completely eroded once taxable income reaches £116,210.

By making a pension contribution, an individual can reduce their taxable income and reclaim their allowance. This is particularly valuable for individuals with a taxable income of between £100,000 and £116,210.

As well as receiving 40% tax relief on their pension contribution, reclaiming their personal allowance will give them an effective tax relief rate of up to 60%. If they earn over £116,210, they can still reclaim some personal allowance if their taxable income after the contribution falls below £116,210.

2. Erosion of child benefit

From 7 January 2013, if a parent earns in excess of £50,000, child benefit reduces and is completely eroded once earnings hit £60,000.

A pension contribution can help reduce earnings and allow child benefit to be reclaimed as an added bonus.

1image-pension

3. Maximising tax relief on contributions but minimising tax on pension income

Through efficient planning, some clients may be able to receive tax relief at a higher rate than the income tax rate they would pay when it came to taking their retirement income.

Assuming a client retires with effectively 60%-70% of their working income, they may have been receiving tax relief on their pension contributions at a rate of 40% or 50% but pay a lower rate of income tax in retirement.

Many advisers may recommend the use of income drawdown as an effective way of controlling pension income in retirement.

4. Paying in excess of the £50,000 annual allowance but avoiding tax charges

In certain circumstances clients can pay in excess of the annual allowance without penal tax charges applying.

A client can carry forward three years’ worth of unused annual allowance, meaning, subject to earnings, they could contribute up to £200,000 gross in a tax year and claim valuable tax relief at their marginal rate of income tax.

Take a look at the following example:

2image-pension

As the annual allowance for these tax years is £50,000, there is £60,000 unused annual allowance available.

When added to the current year’s annual allowance, a contribution of up to £110,000 gross can be made in the 2012/13 tax year without incurring any tax charges.

Hide comment form Hide comment form
 
  • 1000 Characters left
   
 

Bookmark This

RIS Tweets

Chancellor George Osborne sets date for next Budget https://t.co/IQYPKD5Rh0 https://t.co/EYAqyzRfAf
'Degree needed' to fathom financial small print https://t.co/WFVSUdgUO1 https://t.co/bpNyPQ7Nnd
Older borrowers may be offered mortgages into their 80s and 90s https://t.co/XkPykV0TUR https://t.co/AqKZwmxMRO

Contact us

Retirement and Investment Solutions
5 Lancer House, Hussar Court
Waterlooville
Hampshire, PO7 7SE

T: 01489 878300
F: 0870 0104883
E: advice@retirementis.co.uk