Is it time for high earners to maximise their pension contributions?
Whilst many people will welcome the reduction in the highest level of income tax from the start of next tax year, it does raise the question as to whether individuals affected should be thinking of larger than normal pension contributions before then?
The Chancellor has announced that the top rate of income tax will be reduced from 6 April 2023 from 45% to 40%. As individuals can receive relief up to their highest marginal rate of tax on their pension contributions, it would, therefore, seem sensible to try to maximise the facility to obtain 45% relief whilst that tax rate still exists.
The maximum contributions that most individuals can pay into their pensions (and receive tax relief) on an annual basis is the lower of earnings or £40,000.
However, this allowance is reduced by £1 for every £2 that total taxable income (typically, earnings plus any employer pension contributions, but also any investment income or benefits in kind) exceed £240,000 (their ‘Adjusted Income’). The maximum reduction is £36,000 for those with taxable income of over £312,000 at which point the allowance drops to £4,000.
Individuals can still ‘carry forward’ unused relief from the three previous tax years. As such, those affected should give serious consideration as to whether maximising the use of their allowance from the current tax year and carrying forward any unused relief at the same time would be sensible.
Pensions and innovative investments
There was also an announcement on 23 September with regards to accelerating reforms to the pension charge cap so that it will no longer apply to ‘well-designed’ performance fees. The idea is to encourage pension funds to invest particularly into UK science and technology.
Conversations around this topic started from announcements in the Spring Budget 2021 and currently, there seems little further clarity as to what such investment structures might look like. Without this, it is difficult to gauge whether pension trustees will be as keen as the government on the idea, and will no doubt want answers to questions such as, how liquid the investments might be. However, it is an interesting area to follow developments in and we at Mercer & Hole will continue to update our clients on the latest news on this topic.
Please don’t hesitate to get in touch if you would like any further help and support with your pension planning.