Low earners will have the scope, if in a relief-at-source pension scheme, to claim more tax relief even if they aren’t actually paying any tax. This is because the scheme will reclaim 20 per cent tax on contributions, provided they are less than 100 per cent of their earnings.
If the scheme is a ‘net pay’ pension scheme this situation doesn’t apply because the 20 per cent tax relief can’t be claimed in the same way. This just shows that the division between the two types of pension schemes will become even greater as time goes on, and should be addressed sooner rather than later.
For high earners we have the issue of the lost personal allowance for those with adjusted net incomes between £100,000 and £125,000. If a pension scheme member were to pay a pension contribution of £25,000 gross (£20,000 net) then not only would they be able to claim back 20 per cent higher-rate tax relief on the amount, but they would also be able to reclaim their personal allowance of £12,500.
This means they wouldn’t be paying 40 per cent tax on that £12,500, and would result in the £25,000 pension contribution costing them only £10,000, a 60 per cent tax saving.
The other benefit of this pension contribution is that it would take the pension scheme member out of the TAA because it would most likely reduce their threshold income to below the £110,000 cut-off. This would then restore their annual allowance to £40,000 for the 2019-20 tax year.
Even in years where there are only minor changes, pensions need to be reviewed afresh because of external factors that may have an impact. This dictum relates to both the LTA and the annual allowance, and is why a full review of pension funding on a regular basis is essential to ensuring good client outcomes.
Claire Trott is head of pensions technical at St James’s Place Group
