9th December 2013

Aegon: Tax planning opportunities with pension contributions

With the basic rate income tax limit set at just £32,010 for 2013/14, the number of people paying higher rate tax at 40% is greater than ever before.

Advisers can add real value to the tax planning process by recommending the payment of personal contributions to a registered pension scheme. Consider the following:

•  The personal allowance for 2013/14 is £9,440 with basic rate tax at 20% applying to the next £32,010 of taxable income. Assuming no benefits in kind or unpaid taxes, a client will start to pay tax at 40% on income above £41,450. If a client has a total income of say £45,450, he/she will pay tax at 40% on £4,000. Instead, the payment of a personal contribution to registered pension scheme of £3,200 net (scheme operating tax relief at source) means the client will avoid paying higher rate tax.
•  Clients aged over 65 benefit from an additional age-related personal allowance. For 2013/14 the allowance is withdrawn gradually as ‘adjusted net income’ exceeds £26,100 and lost completely if income reaches £28,220. The payment of a personal contribution (up to the greater of £3,600 and 100% of relevant UK earnings) to a registered pension scheme will reduce ‘adjusted net income’ and the reduction may mean that part or all of the additional age related allowance is retained.
• Clients with taxable income in the region of £50,000 to £60,000 (or more) with children qualifying for the payment of child benefit may be interested in making personal contributions to a registered pension scheme to reduce their ‘adjusted net income’ and retain part or all of their entitlements to tax free child benefit.
• Clients with taxable income in excess of £100,000 will see their personal allowance withdrawn by £1 for every £2 of ‘adjusted net income’ above £100,000 and lost completely if income reaches £118,880. In these circumstances, the payment of a contribution by the client of £15,104 net will reduce their ‘adjusted net income’ to £100,000, effectively ‘reinstating’ their full tax-free personal allowance and giving an effective rate of tax relief on the contribution at 60%.
• Clients with taxable income of £150,000 pay tax at 45% in the 2013/14 tax year. The payment of a personal contribution to a registered pension scheme within the annual allowance (plus any carry forward unused allowance) will increase the income threshold beyond which the 45% tax rate applies, giving the maximum level of tax relief available.

As an alternative to personal contributions, employed clients at all salary levels may wish to consider the use of salary and/or bonus sacrifice to reduce income to the appropriate levels above to achieve similar results, with the employer paying the sacrificed amount as an employer pension contribution, prospectively adding part or all of its National Insurance saving to boost the pension contribution further.

Next steps

Advisers should review their client bank, segment the clients into the appropriate salary bands and target their communications and activity appropriately. Recommending the payment of a pension contribution may help clients reduce the amounts of higher rate (or additional rate) tax they pay, retain their entitlements to existing tax allowances and benefits and boost the value of their retirement savings, adding real value to the adviser/client relationship.
 

More Infomation

Martin Haggart

Aegon Pensions Technical Manager

August 2013

Tax, Trust & ISA, Pensions