To make the most of your tax allowances for the new tax year, it’s best to start planning early.
We’ve prepared a 3-part guide to cover what’s 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. Understanding your allowances is vital to make the most of your pension and avoid paying too much tax.
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 £1million, which may sound generous, but is in reach for many people with a lifetimes’ contributions, and even easy to exceed.
For 2018/19 tax year it will rise to £1,030,000.
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 £40,000.
Tapered Annual Allowance
If you earn over £150,000, your annual allowance starts to taper off. The Tapered Annual Allowance reduces the annual limit by £1 for every £2 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 £210,000, the annual allowance standardises at £10,000. You can still put £40,000 into your pension if you wish – but you will pay £13,500, as 45% tax on your excess contribution of £30,000.
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. 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 employee’s salary into the fund.
For 2018/19 this rises to a total of 5% – 2% from the employer and 3% from the employee. It will increase again for 2019/20 to 3% from the employer and 5% from the employee.
Under the Government’s ‘triple lock’ 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.
|Flat rate State Pension||£159.55 per week||£164.35 per week|
|Basic State Pension||£122.30 per week||£125.95 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. You’ll be able to see some of the ways that the Continuum team can help you in our Client 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 – Enrolment or Tax Advice.