High earners must act fast to beat the cut in pension tax relief: use it or lose it

Posted on the 9 November 2015

High earners must act fast to beat the cut in pension tax relief: use it or lose it

Time is fast running out for higher earners to maximise their pension savings as the Government prepares to slash the generous 45% tax relief available.

From next April many additional-rate taxpayers – those who pay income tax at 45% – will only receive full relief on annual contributions of up to £10,000, compared to the £40,000 they currently enjoy.

If you are affected you need to act now to take full advantage of pension tax relief as this is a case of ‘use it or lose it’.

What is the situation now?

All pension contributions made from earnings qualify for tax relief at your income tax rate – up to an annual limit. The cap on contributions that qualify for tax relief in one tax year, known as the annual allowance, is £40,000 You can save more than this into a pension but you will not get tax relief on contributions over this amount.

What is changing?

In April 2016 the annual allowance will be reduced on earnings between £150,000 and £210,000 to a minimum of £10,000. The £40,000 allowance will go down by 50p for every £1 of income above £150,000.

This would mean, for example, that a person earning £190,000 would have a £20,000 annual allowance while someone earning £210,000 and over would have a £10,000 annual allowance. The immediate cost to someone earning £210,000 will be £13,500 in lost tax relief.

How high earners will see their pension tax relief restricted

Earnings

Annual contribution allowance

Amount of tax relief available (up to 45%)

£150,000 or below

£40,000

£18,000

£170,000

£30,000

£13,500

£190,000

£20,000

£9,000

£210,000 or more

£10,000

£4,500

Who is affected?

Everyone earning £110,000 or more should seek expert advice. This is because the calculation of earnings will include pension contributions. If you have a salary of £120,000 and contribute £40,000 to your pension you will be caught by the measure.

What do I need to do?

Here are some things you may want to consider:

• Contribute the maximum amount you can into your pension before April (as long as you have sufficient disposable income and can afford to do so).

• It is possible to ‘carry forward’ any unused allowance from the previous three years. Last year, the maximum annual contribution was £40,000, while in 2013-14 and 2012-13 it was £50,000. This means you may be able to pay in as much as £140,000 extra.

Anything else at threat?

The lifetime allowance, the maximum amount the government allows you to invest tax free in a pension over your entire lifetime, will be reduced to £1 million from £1.25 million in April. Savers who amass a pot that exceeds this limit and do not take preventative action could be forced to pay 55% tax on the surplus.

The pension regime is highly complex, so it is vital to get expert advice tailored to your situation. Our specialist financial planners can give you the specific guidance you need – please call 020 3201 3900 or contact your local Brewin Dolphin office and we will be delighted to help you.

Remember – time could be running out for your pension tax relief, so it is important to act now.

For more information, speak to Brewin Dolphin, corporate partners of the Entrepreneurs’ Forum, on 0191 279 7416


The value of investments can fall and you may get back less than you invested.

Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation which is subject to change.

No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact Brewin Dolphin.