Pension saving is another great tax advantaged area. Personal contributions paid to a pension plan may be eligible to receive basic rate tax relief, as long as at least one of the following apply:
- You are resident in the UK.
- You were resident in the UK both at some stage in the last five years and when you took out the plan.
- You, your spouse, or registered civil partner has general earnings from overseas Crown employment that are subject to UK tax.
- You have Relevant UK earnings. This means earnings that are chargeable to tax in the UK in respect of employment income. This could be salary, income from a trade, profession or vocation or patent income. Be careful though as the UK does not include the Channel Islands or Isle of Man.
If you are eligible, you will receive basic rate tax relief on your personal contributions up to HMRC limits, but the way your tax relief is given depends on the type of pension scheme you pay into. You may also get higher rate or additional rate relief, depending on your tax status. With all of us living and working longer it’s also good to know that tax relief is available until age 75.
If you are eligible for higher rate tax relief on your payments, there are two ways you can claim relief. You can ask HMRC to change your tax code by contacting your local tax office or you can complete a self-assessment tax return after the tax year has ended. If you are eligible for additional rate tax relief on your payments, you must claim the relief through your self assessment tax return.
The other pension allowance to consider is the Lifetime Allowance. This is the total amount of pension savings that you can build up in your lifetime and still enjoy the above tax advantages. This allowance is now capped at £1 million so it’s worth checking the values of any historical pensions you have built up just in case you find yourself near the limits. Breaking these limits can be costly from a tax point of view.
Finally, did you know that parents and grandparents can pay up to £300pm (£240pm after basic rate tax relief) into pensions for children and grandchildren? Where else can children and grandchildren, using current rates, benefit from a 20% return on their investment right away!?
For further information please speak to our Financial Services managing director Simon Claxton.
*Information correct as of 1st May 2016