Your essential guide to 2018 tax allowances Part 2: Pensions
To make the most of your tax allowances for the new tax year, itโs best to start planning early.
Weโve prepared a 3-part guide to cover whatโs changing, and what is staying the same. This, the second part, looks at your pension allowances.
The Government want you to save into your pension and provides generous tax relief, to help you grow your pension pot. However, there are limits to the governments generosity and to the amount you can put away.ย Understanding your allowances is vital to make the most of your pension and avoid paying too much tax.
Lifetime Allowance
The Lifetime Allowance is the maximum you can put into your pension pot without facing a tax bill. Exceed the allowance and you will be charged 25% tax on the excess if you take the money as income, or an eyewatering 55% if you take it as a cash lump sum.
This figure currently stands at ยฃ1million, which may sound generous, but is in reach for many people with a lifetimesโ contributions, and even easy to exceed.
For 2018/19 tax year it will rise to ยฃ1,030,000.
Annual Allowance
The Annual Allowance is the total you can pay in every year, including contributions from your employer. Any contributions you make above it will be taxed at your usual rate.
The annual allowance for 2018/19 will stay at ยฃ40,000.
Tapered Annual Allowance
If you earn over ยฃ150,000, your annual allowance starts to taper off.ย The Tapered Annual Allowance reduces the annual limit by ยฃ1 for every ยฃ2 of adjusted income you receive. Adjusted income is a figure that takes into account employer pension contributions and contributions made via salary sacrifice, less some other reliefs.
What it means in practice is that if your adjusted income exceeds ยฃ210,000, the annual allowance standardises at ยฃ10,000. You can still put ยฃ40,000 into your pension if you wish โ but you will pay ยฃ13,500, as 45% tax on your excess contribution of ยฃ30,000.
Tapered Annual Allowance is unchanged for the new tax year.
Workplace pension contributions
Workplace pensions have been compulsory since Auto-enrolment was first introduced in 2012.ย The scheme has been phased in, and even the smallest and newest firms will be obliged to provide a pension scheme from this month.
Currently both the employee and employer each pay a minimum of 1% of the employeeโs salary into the fund.
For 2018/19 this rises to a total of 5% -ย 2% from the employer and 3% from the employee.ย It will increaseย again for 2019/20 to 3% from the employer and 5% from the employee.
State Pension
Under the Governmentโs โtriple lockโ guarantee, the State Pension must rise each year to keep pace with inflation, earnings growth or 2.5%, whichever is the higher.
The current high inflation figures mean a 3% boost for both the new flat rate State Pension and the old basic State Pension.
2017/18 | 2018/19 | |
Flat rate State Pension | ยฃ159.55 per week | ยฃ164.35 per week |
Basic State Pension | ยฃ122.30 per week | ยฃ125.95 per week |
What should you do about your pension in 2018/19?
With changes to lifetime allowances, a pension review from the Continuum team could be a way to make the most of your retirement. It could make sense to look at your other financial arrangements as well. Youโll be able to see some of the ways that the Continuum team can help you in our Clientย Brochure
Watch out for part three of our guide, next week, with our essential guide on the tax you pay.
The value of your pension and investments can fall as well as rise. You may get back less than you invested.
Levels, bases and reliefs from taxation are subject to change. Tax treatment depends on individual circumstances
The Financial Conduct Authority does not regulate Auto โ Enrolment or Tax Advice.
Get in touch
If you would like to discuss further please call us onย 0345 643 0770, email us at info@staging.mycontinuum.flywheelsites.com or click on the โContact Usโ link below. Thank you.