Pension Savings – The Unexpected Tax Charges
Caps on pension payments are nothing new and many personal pension savers will be aware that one cannot save unlimited amounts in a pension plan. Perhaps what is less well known are the tax implications on your pension savings whether made personally and/or on your behalf by your Employer.
1. Pension Savings – Annual Allowance
Generally, the maximum annual amount which can be saved into a typical pension plan is £40,000, known as the annual allowance. This amount can be greater if there are unused allowances from the 3 immediately prior tax years.
From 6 April 2020 if annual income exceeds £200,000, this £40,000 allowance will be reduced – the amount by which it is reduced will depend on the level of your income in the tax year.
For most income earners, there is a minimum annual amount which can be saved of £4,000.
If the relevant applicable threshold is exceeded, income tax charges could be applied.
2. Pension Savings – Lifetime Allowance
There is also a cap on lifetime pension savings, known as the Lifetime Allowance (‘LTA’), which for the current tax year is £1,073,100.
If the cumulative value of the pay outs from pension savings exceeds this amount, tax will be due on the excess.
Amounts in excess of the LTA that are taken as a lump sum are charged at 55% and income is charged at 25%.
There is however the possibility of protecting a greater LTA of up to £1.25 million if the total capital value of your pensions at 5 April 2016 was over £1million.
Action to consider
- Reviewing unused allowances from the 2017/18, 2018/19 and 2019/20 tax years
- Applying unused allowances against any excesses
- Report excess pension savings
- Plan and budget for any taxes due on such savings
- Make increased pension contributions to utilise your Annual Allowance and unused Annual Allowances brought forward
- Make an application for Fixed Protection 2016 or Individual Protection 2016.
- Understand inheritance tax implications of pensions.