Pensions have undoubtedly become a lot more attractive as a way for business owners to extract profits from their businesses however some changes are coming into effect from April which advisers, accountants and individuals need to be aware of and plan for.
With these changes come some potential opportunities to reduce tax liabilities before the end of the tax year.
So, what are the main issues to be aware of?
Annual allowances and pension input periods
Without getting too technical, there is an opportunity for individuals to contribute up to £80,000 into their pension pots this tax year as the Government is aligning pension input periods to run in line with the tax year. This means that individuals could save double the amount they usually can into pensions this tax year. You need to be careful about how it’s done and not everyone will benefit, however for those clients looking to extract profits from businesses, it could be a very useful planning tool for this tax year only.
The Reduced Lifetime Allowance
The lifetime allowance is reducing to £1m from April. This is the maximum amount of pension savings you can have without paying an additional punitive tax charge. However some clients could benefit from certain forms of “protection” which will enable them to retain the current lifetime allowance of £1.25m. Failure to be aware of this and act accordingly could cost upwards of £62,500 in additional tax paid.
The tapered annual allowance for higher earners
The amount higher earners can pay into pensions is being restricted through the tapering of the annual allowance. This essentially means if your gross income exceeds £150,000 your annual allowance of £40,000 will start to be reduced. This gradually reduces to £10,000 per annum for those with incomes in excess of £210,000. Therefore careful planning for higher earners who contribute to pensions will need to take place to make sure they aren’t unwittingly left with an additional tax charge at the end of the year.
Advising these clients
It is vital to identify any clients who may be affected – and the chances are many of your clients will be – and then do the following:
- Work out the annual allowance used for the current tax year – and the headroom available
- Establish whether or not they could benefit from any carry forward of unused annual allowances (you need to look at the pension inputs over the last 3 years to work this out)
- Calculate the total value of their pension assets and compare to the lifetime allowance (currently and the reduced allowance of £1m)
- Establish the likely growth rate of their pension funds and potential future contributions to work out if they could benefit from any form of protection
If you or your clients would like any help or advice in this area, then please do get in touch. There is a limited window of opportunity between now and March so it is important to act now.
We are currently helping many business owners effectively plan for these changes and not only protect against the longer term downsides but also take advantage of any of these changes which can lead to immediate tax savings.