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Are you set to get the best tax saving this year, and also to maximise your future retirement income? Making full use of your annual pension allowance is a great way to do this. However, this “refreshes” in April – signifying the end of the 2021-22 tax year, and potentially removing a window of opportunity to get the best deal for your financial plan.
In this article, our team at Cedar House shows how the annual allowance works, why it matters and how to use it to your full advantage. We hope you find this content useful. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
The annual allowance
Each financial year (April-April), you can put up to £40,000 into your pension pot(s) – or, up to 100% of your annual earnings (whichever is lower). There are at least three strong reasons to consider making pension contributions:
- You can save on tax. When you contribute to a pension, the tax you would have paid on this goes into your pension instead. This is typically done via PAYE, via your payslip by your employer.
- You can boost your retirement savings. Since you get “tax relief” on your pension contributions, this effectively amounts to a 20% boost to your savings for Basic Rate taxpayers – or, 40% for those on the Higher Rate.
- Employer contributions. If you contribute to a workplace pension, then under the UK auto enrolment rules your employer must also put in at least 3%. This is a nice extra bolster to your retirement fund.
The April deadline
The financial year ends on the 5th April. At this point, most of your unused allowances are lost. For instance, any unused £20,000 tax-free ISA allowance is gone – as are any unused tax-free allowances for capital gains tax (up to £12,300), interest (i.e. the £1,000/£500 Personal Savings Allowance) and dividends (£2,000).
With pensions, there is a bit more flexibility. You can still access any unused pension allowance from the previous three tax years. However, any unused allowance from the fourth prior year will be lost come April 6th 2022.
This makes it especially important to check your pension plan in January 2022 – in good time ahead of the April deadline. With three months ahead, there is still an opportunity to arrange your affairs and get the most from your allowances, potentially saving on tax and boosting your long term retirement savings.
Examples & options
Suppose you earn £40,000 per year – allowing you to put up to this amount into your pension. Also, imagine you also earned this amount in the previous three tax years. However, throughout this time you did not make any pension contributions (e.g. because you are self-employed and did not set up your own scheme). Assuming all qualifying criteria are met, this means you could put up to £160,000 into your pension before April 5th.
You might already have this money handy; perhaps because you recently came into a large inheritance. However, it might be that money will be arriving to you gradually – perhaps due to selling some assets (e.g. a Buy to Let). In any case, it helps to plan ahead as much as possible. Leaving things until near the April deadline risks running out of time, and not getting the best deal for your tax plan and overall finances.
In certain situations, waiting too long could lead to a large loss. Let’s alter the example above, slightly, to illustrate. Suppose three tax years ago you earned £40,000 per year, but in the next tax years you earned £20,000 per year (e.g. due to a career change). Over this time, you did not make any pension contributions. However, you recently came into some money and want to put this into your pension.
If you took advantage of the unused allowance in the tax year when your income was £40,000, then you could put up to £100,000 into your pension in the 2021-22 tax year (i.e. £40,000 + £20,000 + £20,000 + £20,000). However, suppose you left this decision until later in the year – after April 5th. Assuming your income for 2022-23 stays at £20,000, this means you can now only put up to £80,000 into your pension using the “carry forward” rules. This is because your annual allowance for the years when you earned £20,000 is just that (£20,000). The year when you earned £40,000 has been lost into obscurity, as this now happened over three years ago.
Be careful not to underestimate how long it can take to organise your pension. This can involve tracking down old, forgotten-about schemes and contacting administrators to establish what you can do with them. You may need to consolidate various pension pots and sort out paperwork involving the administration of an estate (if you are looking to contribute from an inheritance). As such, we encourage you to talk with a financial adviser as soon as possible, if you are looking to get the most from your annual allowance.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk