Michael Lansdell explains the importance of preparing for the long term.
The tax privileges of investing in pension plans make them a key focus in tax planning. So, even if you’re a business owner who finds the topic confusing, it is definitely worth taking some time to familiarise yourself with pensions to ensure that you are doing all you can to optimise your finances and prepare for retirement.
Pension funds are broadly free of UK tax on their capital gains and investment income. When you take the benefits, up to 25 per cent of the fund is normally tax free, but the pension income will be taxable.
Most people aged 55 (rising to 57 in 2028) and over can draw their pension savings flexibly. Withdrawals above the tax-free amount are liable to income tax at your marginal rate. You should take advice from a pension advisor before accessing pension savings, as there are several options, and they will generally have a long-term effect on your financial position.
Pensions in the pandemic
Of course, the coronavirus crisis might have affected your pension savings. With the possibility of reduced tax relief for pension contributions from 2021/22, and with advice from a pension specialist, you may want to maximise your contributions for 2020/21 by making further contributions before April 5, 2021, or to be even more vigilant against a surprise announcement in the chancellor’s forthcoming budget, before March 3, 2021.
There is an annual limit of £40k on pension contributions that qualify for tax relief, although it is tapered down to a minimum of £10k if your income exceeds £240k. You can, however, carry forward unused annual allowances for up to three years to offset against a contribution of more than the annual limit. You can pay up to the whole of your earnings into a pension scheme, but the tax relief is capped by the annual allowance plus any unused allowances brought forward.
Tax relief on pension contributions is at least 20 per cent, and higher or additional rate taxpayers receive relief at 40 per cent or 45 per cent. In Scotland, intermediate, higher and top rate taxpayers receive relief at 21 per cent, 41 per cent or 46 per cent.
Another thing that you could do is to set up a pension for your partner or children since they don’t need earnings to build up to £3,600 in a personal pension. Even if they do not pay any tax, they can still benefit from 20 per cent tax relief.
Lifetime allowance
The maximum you can hold in a tax-favoured pension scheme without triggering an extra tax charge is £1,073,100 in 2020/21 (expected to rise by at least the consumer price index (CPI) in 2021/22).
Need more guidance? At Figurit, we would encourage you to speak with a pension advisor. We’re also experts at tax planning too. Business owners and professionals had a tough 2020, and you may wonder if you are in any position to prepare for the long term, when the short and medium term needs more careful attention. But when you plan ahead, you give yourself options and the freedom to adapt to whatever the future throws your way.
For more information visit https://figurit.com/uk/dental-tax-accountant/