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Pádraig Floyd finds out how you can avoid joining the growing number of people breaching tax-free pension limits
I T ’ S THE END OF THE
TAX YEAR , which usually means those who got their selfassessment return in on time are now allowed to kick back and put their feet up . However , a couple of nasty little twists mean many people approaching retirement may not find the next few weeks so relaxing .
The government has been reducing the amount of tax relief on pension contributions for higher paid individuals in recent years . The lifetime allowance – how much you are allowed to contribute to a pension – fell from £ 1.5m to £ 1.25m in 2014 / 15 and is now down to £ 1m .
There are only a few weeks left to claim protection at £ 1.25m for those who qualify , but there are dangers to watch for , including the pensions tapered annual allowance .
THIN END OF THE WEDGE The taper is a sliding scale that reduces the £ 40,000 annual allowance ( AA ) tax relief on pension contributions as income exceeds £ 150,000 .
A Freedom of Information request from Royal London found the number of people reporting they had breached the annual allowance rose by 79 per cent between 2012 / 13 and 2014 / 15 , the latest year for which figures are available .
“ You can imagine a client who needs to access their pension to pay down debt or fund a divorce settlement ”
In 2012 / 13 , when the annual allowance was £ 50,000 , 3,900 people reported on their tax return they had saved more than the permitted amount , a figure that rose to 7,000 people in 2014 / 15 when the limit was cut to £ 40,000 . Royal London says the number is likely to have risen substantially in 2016 / 17 when anyone earning £ 210,000 or more will have seen the limit tapered down to just £ 10,000 following rule changes in April 2016 . Those who breach the limit will face a charge to claw back any tax relief they have received on contributions above the allowance .
However , determining whether you are liable isn ’ t as simple as looking at your payslip or invoice book . That ’ s because there are two ways to assess your income .
DO THE MATHS Claire Trott , head of pensions strategy at Technical Connection , points out that if your income , less gross personal pension contributions , plus basic rate tax relief , is under £ 110,000 , then the taper won ’ t affect you .
“ Unfortunately , a lot of people skip that step and cause themselves some worry ,” she says .
16 trustnetdirect . com