Pension Planning

Scottish resident taxpayers earning in excess of £26,000 will have a higher marginal rate of income tax than in the rest of the UK from April 2018.  Whilst this is currently limited to 1%, it provides a small added incentive to make pension contributions.  This can be particularly beneficial for those individuals who may earn over £50,000 where their child benefit is reduced, or those earning over £100,000 where the loss of personal allowance gives an effective tax rate of 60% or more.

Since 6 April 2016, individuals who have an “adjusted net income” of more than £150,000 for a tax year will have their pensions annual allowance restricted.  Each year is treated separately.  Employer pension contributions are taken into account and therefore it is not possible to use salary exchange (in lieu of a company pension contribution) to reduce an individual’s adjusted net income to below £150,000 to gain a higher annual allowance for the year.  Where an individual has threshold income of £110,000 or less, they will not be subject to the tapered annual allowance even if their adjusted income is greater than £150,000.  Where an individual’s adjusted net income exceeds £150,000, the pensions annual allowance is restricted (at the rate of £1 in every £2).  The restriction is capped at £30,000 (i.e. adjusted net income of £210,000), at which point the tapered annual allowance is £10,000. 

The nomination of death benefit beneficiaries is usually made when the pension plan is put in place.  This should be reviewed regularly to ensure this is up to date and reflects your current wishes.  In addition, it may be useful to have family members (e.g. children) included as a beneficiary with a share of the benefits (e.g. 1%) as this can provide the pension trustees with additional flexibility to whom the death benefits are paid.

Top tips:

If an individual does not use their pensions annual allowance for a year, it is carried forward to the following year.  This can allow larger lump sums to be paid as a pension contribution and for tax relief to be claimed.  On 6 April 2018 (i.e. the new tax year) the pensions allowance for 2013/14 will be lost.  This could result in the loss of £30,000 of pension capacity for those individuals whose annual allowance is tapered to £10,000.  It is a case of use it or lose it!

For clients in final salary schemes the growth in their pension scheme in excess of the annual allowance can lead to income tax charges.  In some cases, the individual can request that the tax charge is paid from the pension scheme directly.  For affected individuals, we are finding that some pension providers will settle only part of the tax liability (which is related to the tapering of the annual allowance).  This means that some of the liability will need to be paid by the individual, and can lead to very significant personal tax liabilities.  If you are in this position, we would suggest speaking to one of the JC Wealth team.

Back to the Top Tax Tips Guide.