Private pension tax relief

There was much speculation prior to the budget last month, that the tax relief for higher rate tax payers was going to be scrapped, or reduced. Many pundits were expecting a flat-rate tax deduction of 33% rather than tax relief for higher rate taxpayers of 40%.

Fortunately, for those who may have been affected by a reduction, this change was conspicuous by its absence.

Presently, therefore, the annual tax-free allowance continues to be £40,000 a year. You can top-up this allowance with any unused allowance for the previous three tax years.

You may also be liable to pay tax if the combined value of all your pension pots is worth more than £1m. What counts towards your lifetime allowance depends on the type of pension you are paying into:

  1. Defined contributions schemes are valued as the money in pension pots that goes towards paying you, however you decide to take the money.
  2. Defined benefit schemes are usually valued at 20 times the pension you get in the first year plus your lump sum.

There are also certain protected policies where the expected retirement age is lower than the usual age 55 years limit, for example professional dancers and sportspersons. If this lower retirement age is written into pension plans, then the £1m lifetime allowance is reduced proportionately.

Now there is more certainty regarding the tax benefits of contributing into a pension, readers still making contributions should consider a consultation with their pensions advisor before the end of the current tax year (5 April 2018). Shifting potentially taxable income into a tax-free pension fund still makes good financial sense in appropriate circumstances.

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