Building Wealth for Tomorrow: A Complete Guide to Maximising Your Pension

We have seen an increase in corporation tax this year from 19% to 25% and so there is no better time to consider your pension arrangements to take advantage of the tax relief available on such expenditure.

Pensions play a crucial role in securing financial stability during retirement, offering individuals a source of income after they cease their working years. Contributing to your pension can be done in a variety of ways using various types of pension plans, some of which we have detailed below.

Workplace/Employer pensions

In a workplace pension scheme, employees and employers contribute to build a retirement fund.

The government’s auto-enrolment initiative requires employers to automatically enrol eligible employees into the scheme, and contributions are deducted from their salary unless they actively choose to opt out.

Workplace pensions usually fall into the following 2 categories: –

  • Defined benefit (DB) pension scheme.
    • In this type of scheme, the eventual pension income is predetermined based on factors such as salary history and years of service. In a DB scheme, the employer bears the investment risk and commits to providing a specific pension amount upon retirement, regardless of the investment performance.
  • Defined contribution (DC) pension scheme.
    • In this type of scheme individuals, and often their employers, make regular contributions to a pension fund. The eventual pension income is determined by the contributions made and the performance of the investments within the fund. This is the scheme commonly associated with auto-enrolment.

Personal Pensions

Individuals can opt for personal pensions, which are private pension plans independent of their employment.

Self-invested personal pensions (SIPPs) allow more control over investment choices.

Contributions to personal pensions can attract tax relief, making them a tax efficient way to save for retirement.

What are the benefits?

Contributing to a pension in the UK has several benefits, such as: –

  • Tax free investing. You can grow your money free of UK income tax and capital gains tax.
  • Shelter up to £60,000. Get up to 45% tax relief in your pension each tax year.
  • Free from inheritance tax. You can pass on wealth tax efficiently.

What are some of the tax implications?

Annual allowance

Your annual allowance is the most you can save in your pension pot in a tax year (6 April to 5 April) before you have to pay tax.

You’ll only pay tax if you go above the annual allowance. This is £60,000 in the current tax year.

If you use all of your annual allowance for the current tax year you might be able to carry over any annual allowance, you did not use from the previous 3 tax years.

Taking money from your personal pension

From the age of 55 (rising to 57 from 2028), you have the choice of accessing your pension pot through one of the options below:

  • Keep your pension savings where they are and take them later.
  • Use your pension pot to buy a guaranteed income for life or for a fixed term, also known as an annuity.
  • Use your pension pot to provide a flexible retirement income, also known as a pension drawdown.
  • Take several lump sums. Usually, the first 25% of each cash withdrawal from your pot will be tax free. The rest will be taxed.
  • Take your pension pot in one go. Usually, the first 25% will be tax-free and the rest is taxable.
  • Mix your options. Choose any combination of the above.

What are the benefits of making pension contributions from my business?

Making pension contributions from your business into a pension has 3 major tax-saving benefits:

  1. HMRC treats company pension contributions as an allowable business expense (assuming all conditions are met), reducing your company’s corporation tax bill.
  2. You pay no income tax on the contribution, unlike additional salary or dividends.
  3. Your pension can grow tax-free.

Making a contribution through your limited company is usually more tax-efficient than making the contribution from your own funds.

An additional benefit is that employers don’t have to pay national insurance contributions on pension contributions. The national insurance rate for 2023/24 is 13.8%, so by contributing directly into your pension rather than paying the equivalent in salary, you can save an additional 13.8%.

If you would like any additional information in respect of the tax implications of making pension contributions, please get in touch.

Maximising Your Pension

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JWR are a three director, progressive, modern and friendly firm of Chartered Accountants and Chartered Tax Advisors based in south east Hampshire. Trading since 1992, we have built a reputation for client care and ‘out of the box’ solutions.

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