Last week we looked at 5 reasons to consider paying into your pension for in the current tax year before the clock ‘resets’ on 6 April 2017.
Here we look at a further 5 reasons.
For additional advice or assistance in relation to pension contributions, please do not hesitate to contact us.
Dividend changes for business owners
Since April 2016, directors of SME’s will likely face larger tax bills due to the increases in dividend taxation rates. Whilst any dividends over and above the current £5,000 tax free allowance will still be chargeable at the relevant rate, making pension contributions could help to reduce overall tax liability. By making employer pension contributions from profits, corporation tax liability can also be significantly reduced.
Company directors aged 55 and over could divert profits that would otherwise have been paid in dividends into their pension and then withdraw a portion of it tax free (up to their own 25% tax free allowance).
It is worth noting that the Chancellor announced in the Spring Budget plans to reduce the dividend tax free allowance to £2,000 from April 2018.
Pay employer contributions before Corporation Tax relief reduces
Corporation Tax will reduce to 19% as of 6 April 2017, with a timeline to further reduce this to 17% by 2020. In order to benefit from the current rate of tax relief of 20%, companies may want to consider bringing forward pension funding plans.
Sacrifice bonus for employer pension contributions
If you are due an annual bonus as an employee, or now is the time you look to take a lump sum in a dividend from your business as a director, you may want to consider making an additional pension contribution instead. As a bonus often takes you into a higher income tax bracket, receiving a pension contribution instead can result in a significant effective rate of tax relief. Although salary sacrifice cannot be used to avoid falling into the annual allowance tapering covered in last week’s article.
Boost SIPP funds now before accessing flexibility
Anyone looking to take advantage of the new income flexibility for the first time may want to consider boosting their fund before April, potentially contributing the full £40,000 from this year plus any unused allowance carried forward from the last three years. The Money Purchase Annual Allowance (MPAA) will mean the opportunity to continue funding will be restricted. The MPAA is currently £10k but will fall to £4k in April 2018 with no carry forward available.
Anyone already in capped drawdown (remaining within pre-set income limits), or who only takes their tax free cash will retain their full £40,000 annual allowance.
Providing for the next generation
Should you choose to make additional pension contributions as a result of any of the above points, or those detailed in our previous email on the same topic, the overall effect will leave you with a larger pension pot to draw on in your retirement, or potentially before thanks to pension freedoms. Since pension freedom legislation came into play, the new death benefit rules also make pensions an extremely efficient way of passing on wealth to family members. In the vast majority of cases, if death occurs prior to the age of 75, family members can inherit the remaining value of a pension fund free of tax (subject to Lifetime Allowance limits).
It is also worth noting that pensions are generally sheltered from Inheritance Tax (IHT) – making a compelling case for transferring funds from other taxable savings environments to the IHT advantaged environment of a pension.
If any of these points are relevant to you and you’d like to discuss how best to proceed with your pension contributions for this tax year, please contact us.