The new tax year brings changes to pension rules, which came into effect on April 6. And it’s good news all round for pension investors. They include changes to the lifetime allowance and the reduced (tapered) annual allowance.
Thankfully, the rules on tax relief haven’t changed much, despite the rumours before the Budget.
This article is not personal advice. If you are unsure whether an investment is right for you seek advice. All investments can fall as well as rise in value so you could make a loss. Tax rules can change and benefits depend on personal circumstances.
How much can I pay into a pension this tax year?
The rules and benefits are mostly the same as last tax year. For anything you want to pay into your pension the government will automatically pay 20%, to help boost your savings. This is called pension tax relief and you’ll qualify if you’re a UK tax resident under 75. If you pay tax at a higher rate you can claim back up to a further 25% through your tax return. Or if you’re a Scottish tax payer you could claim back up to 26%.
To get tax relief, the general rule is you can only pay in as much as you earn, or £3,600, whichever is higher. Let’s say you earn £30,000 a year, this would be the maximum you could pay into your pension and get tax relief on. You’d only need to pay in £24,000 and the government would pay the rest (£6,000).
There’s also a cap on how much you can pay in each year called the annual allowance, and for most people this is £40,000, but certain rules mean your allowance could be lower.
To work out how little a pension contribution could cost you, try our tax relief calculator.
Remember a pension can’t normally be accessed until 55 (57 from 2028), when up to 25% can be taken tax free with the rest taxed as income.
Higher earners can earn more without being penalised
In a nutshell, the benefits of tax relief (up to 46% boost from the government) in previous tax years might have been less generous if your adjusted income was more than £150,000. Adjusted income is broadly your total income from all sources plus any employer pension contributions.
You could have been more restricted in how much you could pay in to your pension and get tax relief. The amount could have been reduced from £40,000 to as little as £10,000. This is known as the tapered annual allowance.
Under the old limits, you would’ve been assessed if your threshold income (total taxable income plus any salary/bonus sacrificed for pension contributions, minus any personal pension contributions you make) hit £110,000. But with the new limits which came into effect on 6 April 2020, a reduced allowance will only kick in if your threshold income exceeds £200,000 and your adjusted income is above £240,000.
This means higher earners could earn more without being penalised to a reduced pension allowance. It also means more higher earners can pay up to £40,000 each year into their pension.
The NHS was particularly affected by these rules as reports suggested that doctors were turning down additional work so they wouldn’t be caught by the tapered annual allowance. Now doctors can pick up more hours without being penalised and most of them will be able to pay more into a pension than in previous tax years.
What’s the catch?
The annual allowance for those on the very highest of incomes (earning more than £312,000 per year) could be reduced to as little as £4,000, whereas under old limits the lowest tapered allowance was £10,000.
To find out more about the tapered annual allowance, download our factsheet.
Rise in the lifetime allowance
The lifetime allowance sets a limit on the amount that can be paid into your pension over your “lifetime”, without triggering a tax charge.
A rise in inflation means that the lifetime allowance has also risen for the 2020/21 tax year. The maximum you can now build up in a pension is £1,073,100. This is good news if you’re nearing the lifetime allowance and you’re planning to take benefits this tax year (2020/21). It could mean you’d end up with up to £4,525 in extra tax-free cash.
How to pay into a pension
Tax relief is one of the most generous tax perks available. And you can make the most of this benefit by paying into a pension.
If you have an HL Self-Invested Personal Pension (SIPP), it’s quick and easy to make a payment online – you simply need to log into your account.
If you don’t have a personal pension, but you’d like to set one up, you could consider starting an HL SIPP. It’s an easy to manage pension that puts you in control. You can choose your own investments, track how it’s doing online at any time, and make changes whenever you like. And it’s easy to get started, you can open an account online in minutes.
— to www.hl.co.uk