Techzone

The tax year end has always presented an opportunity to discuss pension funding with clients to make the most of allowances on offer and maximise other tax breaks, but this year there are some fresh funding opportunities to consider.

The pension funding landscape has changed significantly, in particular with regards to the scrapping of the LTA charge. Paired with the increase to the annual allowance, there's an opportunity for larger contributions from a greater number of clients.

We have compiled a checklist of discussion points that may prompt action for your clients before April.

1. Annual allowance

   The annual allowance for the current year is £60,000, an increase of £20,000 over the previous year. The extra scope to pay more into pensions could reduce the higher tax bills faced by some clients whose earnings have crossed the higher rate or additional rate thresholds.
   
   The personal allowance and basic rate bands have been frozen since 2021 and the threshold for paying additional rate tax has been cut for this year from £150,000 to just £125,140. With the freeze expected to last until 2028, more clients will be dragged into higher bands as earnings rise. A pension contribution will extend both the basic rate and higher rate bands by the gross amount paid. Extending the bands may also provide an opportunity to reduce tax on bond gains taken in the year.
   
   There may be a case for delaying funding in Scotland until after the tax year end as income tax rates are set to increase and so more relief could be available in the 2024/25 tax year. However, delaying means that any unused carry forward allowance from 2020/21 will be lost.

2. Carry forward of annual allowance
   

   The increase in this year’s annual allowance plus unused allowance carried forward from the last three years allow a maximum contribution of £180,000 for those that had a break from pension funding. Clients must have enough ‘UK relevant earnings’ in the current year to get full tax relief on individual contributions (providers may not allow contributions in excess of earnings).

3. No LTA charges

   As there are no longer any LTA charges when funds are crystallised, clients who have put the brakes on funding to stay within LTA may wish to recommence pension savings.
   

   Even if a clients existing benefits exceed the new 'lump sum allowance' meaning they are not entitled to any further tax-free cash, pensions can still be a great place to save. If the tax relief on received on the contributions mirror the tax payable when benefits are taken it is tax neutral, but of course, the pension pot will generally be free of IHT and will still enjoy investment returns free of income tax and CGT – effectively a pseudo IHT free ISA.

   Only where a client’s tax position in retirement is likely to be higher than the relief on the contributions will they be worse off - for example, if they withdrew all the benefits in one go.

4. Clients with protection

   Those with either enhanced or fixed protection will have stopped paying into their pensions years ago as a condition of maintaining a higher LTA. As there is no longer an LTA charge, the protections will only relate to tax free cash and crucially will not be lost by making new contributions, provided the protection was in place as at 15 March 2023 and hadn’t been lost or revoked before 6 April 2023. As they won’t have made any contributions in the last few years, they could contribute up to £180,000 using carry forward, providing they have enough earnings to justify a personal contribution.

5. Enhanced protection and the LSDBA

   Clients with enhanced protection will have their lump sum and death benefit allowance (LSDBA) limited to the value of their uncrystallised rights on 5 April 2024. As they can recommence pension funding since 6 April 2023 without invalidating their protection, this means there’s a final opportunity to boost their LSDBA by paying a contribution of up to £180,000 using carry forward before the new tax year.

6. Adjusted income limit for the tapered annual allowance
   

   The adjusted income limit increased by £20,000 this year to £260,000, so fewer clients will be subject to a tapered annual allowance. For those with earnings over £360,000, the minimum annual allowance also increased to £10,000 (previously just £4,000). Both open the door to larger contributions. The threshold income (TI) limit remains at £200,000, and any personal contributions will be deducted from income to test if this limit is exceeded. If the result is a figure below the TI then there will be no tapering and the full annual allowance will be available.

7. Money purchase annual allowance
   

   The MPAA increased from £4,000 to £10,000 this year. This could provide extra headroom to pay in for those who have retired and started to draw pension income but have returned to part-time work in some capacity. For those who are considering retirement but have not yet triggered the MPAA, there's an opportunity to boost their pension savings using the full annual allowance and any unused allowances carried forward.

8. Bonus sacrifice

   The tax year end often coincides with a business’s year end and, for some employees, this could mean a bonus payment. 'Exchanging' a bonus for an employer pension contribution before the tax year end can bring several benefits.
   
   The employer and employee NI savings made could be used to boost pension funding, giving more in the pension pot for every £1 lost from take-home pay.

9. Business owners
   

   The main rate of corporation tax has jumped from 19% to 25% this year. Those with profits over £250,000 and paying at the main rate will therefore benefit from more tax relief this year – indeed some may have delayed funding last year for that reason. Companies with profits between £50,000 - £250,000 will not pay the full 25% rate on their profits but will still enjoy more relief.
   
   Often directors will take a significant amount of their profits as a dividend. Dividend rates increased last year, but they are still less than income tax rates. But dividends are paid from profits after corporation tax. This can mean that using some of those profits to make an employer pension contribution with full corporation tax relief instead can be economically advantageous.

10. Self-employed

    Self-employed profits will be aligned to tax years from April 2024. Until now, profits have been assessed on the annual profits in the business year ending in the tax year. This tax year is a transitional year which could mean that taxable profits will be based on an extended period, although there are provisions that allow these ‘extra’ profits to be spread over the next five years to prevent a heavy tax charge this year. For example, in 2022/23 a self-employed individual with a business year ending on 30 April would have been taxed on the 12 months profits to 30 April 2022. This year they will be taxed on the profits made in the year to 30 April 2023 plus the profits made between May 2023 and 5 April 2024 – a period of 23 months.
    
    Even if these extra profits are taxed over five years, there could still be a spike in profits and consequently an increase in pensionable earnings. A larger pension contribution could be considered to boost savings and alleviate some of the extra tax liability.

11. Retention of personal allowance and child benefit
    

    Personal contributions can help recover personal allowance and child benefit, as they’re seen as a deduction from earnings. The personal allowance is reduced by £1 for every £2 of earnings (specifically ‘adjusted net income’ or ANI) in excess of £100,000. Child benefit is assessed on the highest earner of a household and is eroded by 1% for every £100 of ANI in excess of £50,000.

12. Tax-efficient planning for couples

    For couples, consider maximising tax relief at higher rates for both, before paying contributions that will only secure basic rate relief. Many clients won't know they can top-up pensions for their partners - and not just by £3,600, but up to their partner's earnings. Tax relief will be given at the partner's marginal rates of tax.

Summary

Pensions remain the most tax efficient way to save for retirement for most people. This is because part of the benefits can be taken as tax-free cash, and overall returns augmented by the possibility that tax relief during a client’s working life will be higher than the tax paid when income is withdrawn in retirement.

Effective tax planning is a year-round job. But it's only at the end of the tax year that you have all the information needed to use the allowances and reliefs in a tax efficient way. This can be a boost to savings but remember that, in most cases, allowances not used before the end of the tax year will be lost altogether.